Question 1
In 2002, the audit firm Arthur Andersen (AA) collapsed following charges brought against it in the United States relating to the failure of its client, Enron Corporation, a United States energy company. Enron was one of the biggest clients of AA. The relationship between Enron and AA was said to be 'cosy', facilitating both improper accounting and auditing practices. These practices led to extensive legal proceedings and the eventual collapse of AA. Some of AA's other audit clients announced that they would be dismissing AA as their auditor even before it was clear that AA would not survive.
Required:
Use the three (3) theories outlined in Chapter 1 of Moroney on the demand for audits to illustrate why these clients dismissed Arthur
Andersen as their auditor.
Use the following for background to this case:
abcnews.go.com/Business/story
news.bbc.co.uk/2/hi/business/2047122.stm
Adapted from Moroney, Campbell & Hamilton (2014)
Question 2
Understanding the structure and composition of the board of directors and its sub-committees assists the auditor in documenting and evaluating the governance structure and in identifying potential risks within that structure.
Required:
1. Explain why an understanding of the governance of an audit client is important in assessing the client's business risk.
2. Explain why an understanding of business risk is relevant to the final audit judgment and to public expectations of the audit process.
3. Access copies of the the 2014 annual reports for Namoi Cotton Co-operative Ltd
4. Examine both sets of annual reports for information about the governance structure of these companies.
5. Identify whether these companies have an audit committee and/or a risk committee.
6. Evaluate the impact that the existence or non existence of these committees may have on the external audit function.