Enron

[ainwood]

Back to the audit thing;

Even before the Enron collapse, the "big5" were training audit teams to keep as little documentation as conceivably possible. This was in the wake of numerous court cases.

My guess would be that they were "old" records that were being shredded.

 

[ainwood]

Originally posted by Knight-Dragon


Basically, financial statements go like these. The accountants of that co will draw up the profit & loss statement and the balance sheet (most important) and other statements and then the auditors will come in to audit those statements. The auditors will query, do statistical 'tests' and so on to ensure financial integrity of the reports. Then the auditors will sign off on the accounts and the co can go ahead to publish them.

Not quite!

Firstly, before the audit the auditors assess the risk of the company. The calculation of risk is used to determine the materiality value of items to be tested - in a large co like Enron materiallity would have been millions. Then the auditors test the prime records, testing material items equal to 10% of materiallity value using the most common audit objectives:

Completeness
Accuracy
Legality
Valuation
Analytical Review (This is probably what you are referring to as statistical tests)
Authorisation
(Just showing off that I still remember them! )


The number of items tested is also dependant on the preceived risk.

Sufficient substantive testing, examination of movements in material balances, analytical review, good planning before the audit and liasing with the client are the key to eliminating the risks.

Before the audit is signed off by the audit partner, a letter of representation is drawn which basically states that the company has given the auditors all necessay information, disclosed all relevant details, complied with relevant legislation and discussed all major issues. This is on the companies letterhead and is certified by the chairman and the accountant for the company. Once this is obtained the audit report will be issued, and the glossy book published. This is the auditors indemnity. However, in Enron case I understand that this important letter was overlooked.