Trimester 1. 2017Auditing, Assurance & Services ACC707 Individual AssignmentResearch QuestionAuditor’s ReportThe new auditing standard ASA701 Communicating Key Audit Matters in the...

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Table of Contents
Sl. No. Topic Page No.
1. Executive Summary 3
2. Lehman Brothers- Background 5
3. Reasons for failure of Lehman Brothers 6
4. Auditor‟s Misrepresentation of Financial statements 7
5. Reason for introduction of ASA 701 8
6. Features of Auditing Standard, ASA 701 9
7. Scope of Auditing Standard 701 10
8. Communicating Key Audit Matters 11
9. Conclusions 13
10. References 14
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Executive summary
The collapse of Lehman Brother was one of the biggest setback for the Global Economy
which compelled the regulatory bodies to
ing about changes in Accounting Standards and
Audit reporting disclosures. The Lehman Brother Collapse is a solid example of Accounting
misrepresentation and window dressing of financial statements by the Auditors.
This report explores the Auditing report of Lehman Brother that was presented in Annual
eport of the company in 2007 to the stakeholders. The audit report provided an unqualified
eport that provides the opinion that the financial statement of the organization is co
ect and
no wrong statement has been provided in the report of the company. It also provided opinion
that there were no material information found that could have negative and pervasive effect
on the financial position of the company. This was later found to be inco
ect and
shareholders were exposed to the risk that they were unaware of.
The introduction of ASA 701 enabled the auditors of other firms to look into the Audit report
of public listed entities. This has proved to be a hindrance in wrongdoings of the auditors.
This standard has also mandated disclosure of Key Audit Material in the report. We have
discussed the details of the scope and objective of ASA 701 in this report.
The main focus being on Lehman
others, the report has tried to explore the deficiencies in
the existing Auditing framework. It covers the circulation of Government Bonds through
“Repo 105” as it is commonly called to generate cash to reduce liability and produce a better
picture of the financial strength of the company. This method of debt financing was not
highlighted by the Auditor in their report, which proved disastrous.
The main highlight of ASA 701 is communicating Key Audit Matters to the stakeholders. In
this report emphasis has been provided on identifying Key Audit Matters while auditing a
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firm. The financial disclosure that should have been included in Lehman Brothers report has
een elaborated. This was not mentioned by the Auditors as it was not mandatory by
egulations
Finally, the usefulness of this standard has been mentioned which has been helpful in
inging transparency to the firm‟s financial position. The stakeholders can rely on the
auditor‟s report with greater degree of confidentiality and trust the financial disclosure in
Annual Report. The greater insight provided by ASA 701 has enabled to avoid crisis like
Lehman Brothers till this date. But how efficient is this standard, only time can tell.
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Lehman Brothers- Background
Lehman Brothers was founded in 1850 by Henry Lehman and his
others Emanuel and
Mayer. Lehman Brothers prospered over decades and centuries, surviving many challenges
that the economy of United States of America faced. It went through the rough times of two
world wars, the great depressions, capital shortage, Capital management collapse and Russian
debt crisis. However, the sub-prime mortgage crisis
ought down the company to its
ankruptcy leaving entire world into a shock and revisit the standards being practiced by the
larger organization. It started the meltdown of global economy because of its size and
usiness presence. It was once considered “Too Big To Fail” but the malpracticing and
window dressing presented a good financial outlook of the company. The organisation was so
ig and influential that it was able to get the auditor‟s report unqualified.
According to Annual report filed by Lehman Brothers in 2007 in accordance with the
standards of the Public Company Accounting Oversight Board (United States) Ernst &
Young LLP expressed an unqualified opinion. This in itself was sufficient to satisfy the
stakeholders that the financial position of the company was strong and there were no
misrepresentation in the financial statement of the company. It also meant that there were no
wrong statement in books of accounts that were of pervasive nature. According to the
Auditors report “ In our opinion, the company maintained, in all material aspects, effective
internal control over financial reporting as of November 30, 2007, based on the COSO
criteria.”
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Reasons for failure of Lehman Brothers
As we all know the business structure of Lehman Brothers included use of Financial
Leverage. The company was highly...