Question 1

Enron’s management

The management played an active role in trying to influence the auditors and compromise their independence too. This shows that they played a primary role in perpetrating the fraud.

Regulators

Regulators played a minimal role yet they should have been significant in trying to ensure that the management’s ability to influence the audit was limited.

Arthur Anderson

The senior management of the firm ought to have investigated the concerns that several senior partners had regarding Enron. The local auditors also had a responsibility of raising concern with Arthur Anderson’s senior management. They also failed to maintain independence hence creating a concern for the profession.

Question 2

-Providing consultancy services such as tax. This aspect tends to affect the auditor’s independence due to the relationship that is established. The association between the consulting service and audit functions of the auditor might arise hence creating the probability of documents manipulation, and this brings the threat of credibility issues for the audit firm involved since objectivity might lack.

-Designing of accounting procedures. This aspect also brings the threat of reduced independence. It can also result in fraud issues since they can develop a complex procedure that is not outright to other users. It is easy to cover up when the other parties do not have a clear understanding.

-Consulting on strategy and operation. A business needs to have a favorable strategy for there to be growth. When this is combined with the reduction of operational costs, there is a high propensity to increase profits. When an audit firm is offering such services, there is the threat of objectivity being impaired.

Question 3

Anderson’s involvement in those decisions did violate some of the prescribed professional auditing standards. Among them is independence.  It is showed that Anderson made earnings of $52 during the 2000 period, but only $25 million was in regard to the 2000 audit. This shows that his interests were not independent with the company hence the probability of conflict of interest. There was also a lack of trying to understand the strength of the client’s internal controls. This usually helps in ascertaining the level of risk involved with a given client. There was also a failure of taking into account the review disclosure from prior parties.

Question 4

The requirements of the audit work papers include the need for auditors to mention whether the financial reports have been prepared pursuant to GAAP. It is required for the auditor to outline instances where GAAP was not consistent in the preparation of these reports. The auditor is also expected to include in the work papers a statement that asserts informative disclosures are not adequate if that is the case. An auditor is also required to state an opinion regarding the financial statements that were being analyzed.

The auditor “owns” the work papers. Simply put, the work papers are a property of the auditing firm involved with the process. However, the client can request for the work papers from time to time.

Question 5

• Prohibiting the provision of non-audit service to audit clients. I slightly support this measure since it would help eradicate conflict of interest, but this would reduce the profits that audit firms can make.
• Establishing and independent audit agency. I support this measure because independence makes it possible to have an objective audit.
• Establishing additional explicit statutory requirements to prohibit the interference of client executives with the independent auditor’s work. I support this measure since it reduces pressure on the auditors hence improving their independence.
• Requiring auditors to work closely with the client’s audit committee. I support the move as it would help to improve the efficiency of both parties.
• Requiring audit clients to periodically change their audit firms. I support the measure as it helps to eradicate the familiarity threat that comes with long-term involvement.

Question 6

The concept of “professionalism” as it relates to public accounting has changed significantly over the years. There is increased regulation with the creation of bodies such SEC, PCAOB, and SOX. The rules and regulations established help to create boundaries between the client and auditor hence increasing the prospects of independence and objectivity. Parties that breach the prescribed regulations are usually punished in different ways. The changes were necessitated by the increased malpractices that were taking place in public accounting.

Question 7

With regards to quarterly financial statements, the responsibility of the auditor is dependent on the preference of the client since it is not a requirement by SEC. In my opinion, quarterly financial statements should not be audited since conducting the annual audit is mandatory. Conducting quarterly audits will bring more interruptions to the client’s business and result in increased audit fees.

 
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