4. What are the auditor independence issues surrounding the provision of external auditing services, internal auditing services, and management consulting services for the same client? Develop separate arguments for why auditors should not be allowed to perform non-audit services for their audit client. What do you believe?

Prepared by:HAZIQ ZAKI BIN MOHD FAZIM 225462MUHAMMAD ZULKARNAIN BIN RAMLI227178MUHAMAD SYAZWI AFIF BIN HALIM226015CHIN SU CHONG 225668What were the business risks Enron faced, and how did those risks increase the likelihood of material misstatements in Enrons financial statements?QUESTION 1Business risksa) What are the responsibilities of a companys board of directors?b) Could the board of directors at Enron especially the audit committee have prevented the fall of Enron?c) Should they have known about the risk and apparent lack of independence with Enrons SPEs? What should they have done about it?

QUESTION 2Board of directorsAble to prevent the fall of Enron The BOD and audit committee could:Monitor revenue and expenses that are significant to Enron

Since Enron issue a large number of SPEs, they should trace SPEs that have significant amount. Action to be donehow Enron used SPE to hide large amounts of debtEnron make use of the weakness in accounting practices to hide the debt, keeping it off the companys financial statement. They shows profit instead of debt in their financial statement. QUESTION 3What are the auditor independence issues surrounding the provision of external auditing services, internal auditing services, and management consulting services for the same client? Develop separate arguments for why auditors should not be allowed to perform non-audit services for their audit client. What do you believe?

QUESTION 4International Standard on Auditing (ISA) stated The audit firm shall establish policies and procedures that require others within the firm, when considering whether to accept a proposed engagement to provide a non-audit service to an audited entity or any of its affiliates, to communicate details of the proposed engagement to the audit engagement partner to consider the implications when performed non-audit services about auditors objectivity, independence, professional judgement and skepticism before engagement accepted.

The threat that might be arises when performed non-audit services to the same client that will affect auditors independence are:

Self-interest threat. Self-review threat. Management threat. Advocacy threatExplain how rules-based accounting standards differ from principles-based standards. How might fundamentally changing accounting standards from bright-line rules to principle-based standards help prevent another Enron-like fiasco in the future? Some argue that the trend toward adoption of international accounting standards represents a move toward more principle-based standards. Are there dangers in removing bright-line rules? What difficulties might be associated with such a change?

QUESTION 5Principle-based is a framework that developed the accounting standard and its continuously changes to ensure the high quality standard of financial reporting and provide guidance that need to be applied in reporting. It also used the professional judgement of auditor on financial statement whether comply with standard or not. Rules-based accounting is basically a list of very detailed rules or codes that must be followed when preparing financial statements and its tied with the law enforcement.

Removing bright line also can trigger problems in some circumstances because involve human judgement and consideration are involved. Auditors and executives may rationalize aggressive of financial decision and then defined themselves when questioned by asserting that accounting standard does not specifically prohibits their actions.

Question 6Enron and Anderson suffered severe consequences because of their perceived lack of integrity and damaged reputations. In fact, some people believe the fall of Enron occurred because of a form of run on the bank. Some argue that Andersen experienced a similar run on the bank as many top clients quickly dropped the firm in the wake of Enrons collapse. Is the run on the bank analogy valid for both firms? Why or why not?Run on the bank a situation when in a fractional-reserve banking system, a large number of customers withdraw cash from deposit accounts in a financial institution at the same time because they believe that the financial institution is or might become insolvent.Enron has shows its likelihood to the valid of run on the bank analogyEnron appeared to become a wildly successful company by creating a new largely unregulated financial business, that of energy trading.The business ran on credit, and required suppliers and users of energy to sign contracts that called on Enron to meet obligations month or years later.Enron became something like a bank, which takes depositors money and promises to pay it back later but had no federal deposit insurance to reassure customers when rumors began to spread that it was in trouble. Anderson as well is likely to the valid of run on the bank analogy.1979, 42% of Andersons $645 million in worldwide fees came from consulting and tax work, as opposed to accounting and auditingMore than half of its income came from non-audit servicesBy 1994, 2/3 of Andersens $3.3 billion in U.S. revenue came from the consulting side.In the aftermath of Enrons collapse , Anderson began to unravel quickly, losing over 400 publicly trade clients by June 2002, including many high-profile clients with which Andersen enjoyed long relationshipsAndersen lost many of its global practice units to the rival accounting and consulting firmsQuestion 7A perceived lack of integrity caused irreparable damage to both Andersen and Enron. How can you apply the principles learned in this case personally? Generate an example of how involvement in unethical or illegal activities, or even the appearance of such involvement, might adversely affect your career. What are the possible consequences when others question your integrity? What can you do to preserve your reputation throughout your career?How can you apply the principles learned in this case personally?IntegrityIt is an important foundation in client and employee or employer relationshipsequates to placing trust in an individual that he or she will conduct themselves with ethical and moral standardsto conduct oneself with a high standard and not engage in activities at our outside of work which would cause someone to question your integrity as well as the trust relationship.

Generate an example of how involvement in unethical or illegal activities, or even the appearance of such involvement, might adversely affect your careerparticipation in gamblingThis activity could be extrapolated to ones personality which could go against the moral of integrity of clients or supervisors.What are the possible consequences when others question your integrity?clients or supervisors may lose trust in you and decide to work with someone else or you may be overlooked for promotion or have other negative consequences.What can you do to preserve your reputation throughout your career?should always conduct themselves with high ethical and moral standards to maintain their integrityinclude judgment and decisions made at work as well as activities engaged in outside of work.always present yourself honestly and avoid situations that may be questionableThe backup of facts or written documentation can help you to avoid this and knowing when to involve higher levels or a third party when you discover illegal or unethical behavior is crucial to maintaining integrity.

Why do audit partners struggle with making tough accounting decisions that may be contrary to their clients position on this issue? What changes should the profession make to eliminate this obstacles? audit firms have a vital interest in pleasing their clients naturally interested in the financial performance of the firm provision of consulting, internal audit, and other services to auditing clients public accounting firms need to be committed to putting the public interest first. provision that audit fees of public companies be paid by a public body and not by the companyQUESTION 8What has been done, and what more do you believe should be done to restore the public trust in the auditing profession and in the nations financial reporting system?Congress passing the Sarbanes-Oxley Act of 2002 consistently demonstrate their commitment to accurately disclose financial and operating information profession to continue to get national support regarding restrictions, guidelines, and expectations the registration of public accounting firms accounting profession should prove its integrity, uphold high moral standards and should behave in an ethical manner QUESTION 9