Auditing and assurance Essay


KPMG ‘s strategic determination of specializing in audits of subprime mortgage houses earned them a big pool of patronage that is a major advantage of being a specializer on a peculiar industry. In order to place themselves as specializers in peculiar industries are to pass their resources and train forces on engineering required harmonizing to specific industry, this manner audit forces and audit houses are better off by understanding the industry throughout where they are specializers which is really cardinal. They continuously invest in deriving more cognition about the industry ‘s internal control, administration construction, manner the concern in conducted which helps them in cut downing the clip taken for audits by at the same time bettering quality. Hearers will be in a better place to advice their clients about the internal controls and how to get the better of possible jobs with cost effectual solutions.

Therefore helps them in supplying a good quality audits for their clients. [ 1 ]Differentiation scheme provides an hearer with sustainable competitory advantage besides helps hearers to bear down premium monetary value avoiding the competition. Industry specialised audit houses assist clients in heightening revelations. Choosing an industry-specialist hearer for scrutinizing their fiscal statements signals a client ‘s purpose to supply enhanced revelations. [ 2 ]Bing an industry specialised audit house besides causes them jobs with cases being monolithic therefore jabing them to diversify their clients to cut down the strength. As for market is concerned it gives raise to anti-competitive environment giving rise to monopoly in peculiar industry which is what happened with KPMG in our instance. It besides causes issues associating to confidentiality of information across the companies as they are audited by same house.

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Any misunderstanding or deceit of accounting policy as with the instance of New-Century they calculated their repayment loss modesty wrongly, such a manner if an audit house does any accounting policy wrongly it affects the whole industry of clients. Equally long as economic systems of graduated table and market are concerned it is good to hold rivals for specialized industries and diversified clients for scrutinizing houses.


  1. Auditing March 2004: A diary of pattern & A ; Theory by casterella, Jeffrey R, Francis, Jere R, Lewis, Barry L, Walker, Paul L Retrieved on 15th May, 2010 from hypertext transfer protocol: //
  2. Auditing March 1999: A diary of pattern & A ; Theory Retrieved on 15th May, 2010 from hypertext transfer protocol: //www.


The hearer who is responsible for carry oning the audit normally called “ Engagement Partner ” is responsible for taking an appropriate battle squad with varied scope of accomplishments, features and competency to independently execute the audit as per the Auditing Standards. Some quality control mechanisms that KPMG should hold followed to better their quality of audit in instance of most of inexperient staff in an battle squad are:

  1. Training their forces about the type of battle and about the industry gives a spot of thought what they should be looking for during the audit. As a portion of developing they can derive some cognition form old old ages audit certification, working documents helps them larn more about the company.
  2. Particular attending in planning should be given to complex and subjective accounting countries, as these have strong potency for fraud. Appropriate planning of audit should be conducted which aids in make up one’s minding the demand for human resources.

  3. Good squad work between the members of engagement squad by efficaciously communicating across the members from experient to inexperienced forces by raising inquiries and discoursing the issues.
  4. Oversing the audit battle by maintaining path of advancement, look intoing whether the squad has sufficient clip to completion, whether they interpretation of instructions are right, whether the grounds gathered and the determinations made are appropriate.
  5. If needed a adviser or more experient forces with relevant cognition and experience should be hired for the battle.
  6. Battle has to be reviewed by engagement quality referee until the referee approves the quality of audit the engagement spouse should non subscribe the audit study.

KPMG failed to follow the basic quality control mechanisms hence ensuing in hapless quality of audit. The important drawbacks refering the battle with New-Century are

  1. Avoiding misinterpretation and keeping a good relationship with client which would assist in supplying the good quality audit at low cost, besides would hold helped their inexperient staff during the audit.
  2. Neglected the engagement quality reviewer study and did non take farther stairss to look into farther based on quality reappraisal study.


  • Australia.

    Auditing Standards Board ( 27 OCT, 2009 ) . ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information. Retrieved on 15th MAY, 2010 from hypertext transfer protocol: //www.auasb.


The aim of scrutinizing house is to publish an unqualified sentiment on the company ‘s internal control, fiscal studies of the year-end and the consequence of internal control in publishing an sentiment on fiscal studies harmonizing to subdivision 404 of Sarbanes-Oxley Act. As the internal controls have important consequence on the fiscal describing the effectual internal controls of a company gives a sensible confidence over the dependability of studies and besides on the fiscal statements generated for external intents. [ 1 ]The hearer ‘s duty is to execute an integrated audit to carry through aims of both internal controls over fiscal coverage and fiscal statements.To place whether stuff failings exist in a company ‘s internal controls the hearer has to be after and put to death audit to obtain grounds beyond sensible uncertainty to publish an sentiment.

Even though fiscal studies are non materially misstated there is a range for material failing of company ‘s internal controls during the fiscal coverage period.“ Lack of internal control exists when the normal class of operations assigned to direction or staff does non let observing the misstatements as and when they occur on timely footing. ” [ 1 ]“ Significant lack is a lack or combination of lacks in internal control, which affects the company ‘s ability of novice, record, procedure, authorise or study external fiscal information in conformity with accounting criterions such that the happening is more likely that a misstatement of a company ‘s fiscal statements those are more than inconsequential will non be detected or prevented. “ [ 1 ]“ Material failing is a important or a combination of important lacks which prevents in observing a material misstatement of fiscal statements which are more likely. ” [ 1 ]During the audit procedure each control lack is evaluated to find whether the lacks either separately or in combination, are material failing harmonizing to the direction ‘s appraisal for the coverage period. However an hearer need non look for lacks those are lesser than stuff failing.

Under proving controls hearer obtains grounds by

  1. Testing design effectivity
  2. Testing operating effectivity

During the audit Entity degree controls are tested utilizing a top down attack. All the important histories and its revelation are verified as per the direction ‘s averments.The hearer forms an sentiment based on the grounds obtained from all beginnings including testing of controls, effectivity of internal controls during the period of fiscal coverage and any identified control lacks or misstatements in fiscal statements during the audit.

If all these grounds does non supply any important lacks of internal control over fiscal statement or stuff failings in fiscal statements so the hearer issue ‘s an unqualified sentiment.The hearer must pass on to the direction in written about all lacks found over fiscal coverage and besides about any ineffectualness in the step of internal controls by internal audit commission about those findings during the audit. He must pass on all these issues in item to internal audit commission and direction.

In the instance of New Century ‘s audit by KPMG, hearers failed to place the important lacks in internal controls and stuff failings resulted in fiscal statements.


  1. Public Company Accounting Oversight Board ( November 2007 ) . Auditing standard no.

    5 “ An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audited account of Fiscal Statements ” . Retrieved on May 16th 2010 from PCAOB

  2. hypertext transfer protocol: // # _ftnref7


Accounting estimations are made when there is an uncertainness in the result of an event due to past dealing or most likely future dealing. A house ‘s direction is responsible for doing accounting estimations which is based past events, certain facts and premises where a professional opinion has to be made harmonizing to the model of accounting criterions and equal revelations.

The hearer ‘s function is to verify the rationality of all the accounting estimations made by direction is in conformity with accounting criterions model and its revelations. It is hard to hold control on these estimations for the direction as these estimations are subjective and nonsubjective factors. By and large the procedure of accounting estimations are handled by competent forces based on certain premises and past available informations.

If the Internal control based on which the accounting estimations are made are effectual that will cut down the likeliness of misstatement of these estimations. The uneffective internal controls affected in instance of New Century ‘s computation of loss reappraisal modesty ensuing in the misstatement of accounting estimations. Auditor has to verify internal controls associating to accounting estimations.

  1. The hearer should obtain sufficient grounds that the effectual internal controls based on which the accounting estimations are calculated are relevant, dependable and sufficient.
  2. Verify whether the estimations are consistent throughout and proper revelations are made in footings of explicating the estimations.

Hearers when measuring history estimations he audits and obtains grounds that those estimations developed were sensible and are presented in conformity to the accounting criterions and its revelations.The hearers review and test the direction ‘s procedure

  1. All the premises were sensible and consistent and relevant with past informations and besides analyse the informations used is sufficiently dependable for the intent.

  2. Any alteration in concern has to be considered to verify the important effects that might do on the premises.
  3. All the certification sing premises used for developing estimations has to be reviewed. Even if an hearer needs a specializer advice can be exercised.
  4. Reviewing of minutess and events that occurred subsequent to the balance sheet day of the month are important in rating of rationality of the estimations and premises used.


  1. American Institute of Certified Professional Accountants ( January 1989 ) . AU Section 342 Auditing Accounting Estimates Retrieved on 16th May 2010 from hypertext transfer protocol: //

    com/viewer? a=v & A ; q=cache:4eGr-5n1mv4J: members/div/auditstd/au-00342.pdf+au+section+342 & A ; hl=en & A ; gl=au & A ; pid=bl & A ; srcid=ADGEESiC-_b99DFDBKZNK85e6OM7LKzqYmViX5MuHGg5_x2AdzEgkk009d2k9efLWzQ4yQYQmOToNdF78FPUJnjbTrv0RxoUhquF8kccgirNQut4j_XDBrhvs72FRsDjs8zurRnqBVSB & A ; sig=AHIEtbS4WRGv1G6PJKt62iXYb1DOVjetBQ


By and large accepted auditing criterions that KPMG has violated and was charged by bankruptcy tester for non following with criterions are

  1. General criterions [ 1 ]
  2. The hearer should be competent to execute the audit. The really first regulation was violated by KPMG when they appointed John Donovan as an battle spouse for 2005 audit who lacks experience with the mortgage industry.The hearer should be independent from all agencies in relation to the audit.

    But KPMG ‘s hearers Donovan and Kim were concerned about losing his client and were non doubting plenty during audit. They went on farther to move unethically by supplying erroneous manner of ciphering loan redemption modesty which worked out in favor of house neglecting the accounting criterions.Due professional attention has to be taken by hearer in respects to executing of audit and in readying of study. During 2004 KPMG ‘s audit commission identified five important lacks in internal controls which were subsequently concluded as non material failings. The audit commission failed to look into the findings further to obtain grounds beyond sensible uncertainty.

  3. Standards of field work [ 1 ]
  4. The planning for audit was unequal.

    Before developing an overall audit program auditor performs analytical processs, entree control hazard and built-in hazard. Despite of addition in loan redemptions from 2004 to 2005 KPMG failed to be after and execute increased testing or processs.Understanding the entity ‘s fiscal statements, its internal controls, hazard of material misstatement are equal to plan effectual audit processs. Inexperienced staff lacked understanding and new audit commission failed to reexamine wholly 2004 audit documents which resulted in deficiency of cognition of the implicit in internal control jobs from old old ages.

    As the hearer should be doubting throughout the audit and should obtain grounds beyond sensible uncertainty to publish an sentiment. Here hearers are non doubting plenty when they were carry oning 2004 audit. During the audit of 2005 the hearer did non obtained adequate grounds to declare the important lacks found in internal control were inconsequential.

    The audit sentiment was biased.

  5. Standards of coverage
  6. The conformance of the New Century ‘s fiscal statements in conformity with by and large accepted accounting rule was decently stated in the hearer ‘s study.Auditor ‘s study should unwrap any alterations in the accounting rules from old twelvemonth to current. When Kim and Donovan provided proactive advice in computation of redemption modesty they failed to unwrap the inside informations about the alterations in accounting policy in their audit study.The hearers must province in the study if any revelations are moderately unequal. I did non happen any grounds in misdemeanor of this regulation by KPMG hearers.The hearer must clearly province the quality of work undertaken and should show an overall sentiment about the fiscal statements in the hearer ‘s study. I did non happen any grounds in misdemeanor of this regulation in KPMG hearer ‘s study.


  1. American Institute of Certified Professional Accountants ( December 2001 ) . AU Section 150 By and large Accepted Accounting Standards. Retrieved on 16th May 2010 from hypertext transfer protocol: //



Mark to market regulation is an accounting policy which values the assets and liabilities based on the current market realisable value alternatively of recognizing by historical value. As the market status change the values of balances on balance sheet alteration often. The just value of assets are based on market non entity specific, the value is the monetary value at which an plus can be sold in a normal dealing between the market participants on the measuring day of the month.

Principle statements opposing the mark-to-market regulation are

  1. The regulation pre-assumes the being of an active operation market, even when person is forced to sell the plus the underlying value is taken into consideration as just value. Therefore statements are made against saying that distress sale considerations have important effects on the values of assets in fiscal statements due to immense write-offs ( due to volatile markets ) therefore ensuing in describing a loss in portion holder ‘s equity which can go on during the fiscal crisis. [ 1 ] Therefore the application of just value accounting does non ensue in the best rating of assets. These short term fluctuations effects on how bargainers value those securities due to panic falsifying the long-run economic value of those securities.
  2. Accounting regulation forced more companies to give the existent value of assets based on current market value assisting the investors in determination devising. But on the other side this statement is important since the balances in balance sheet ever vary.

    My sentiment is to do the necessary alterations get the better ofing defects while maintaining the chief intent undisturbed which is reviewed.

  3. The just value accounting method causes the pro-cyclicality in the assets of houses like Bankss which is an unintended manner during the market rise which reflects into net incomes blow uping the estimations. [ 2 ]
  4. As per my sentiment these inflated estimations has to be decently disclosed including the elaborate computations. The just value acknowledging regulation should necessitate a alteration in the computations where the value should be realised based on existent facts alternatively of sing the hyperbolic market conditions.

  5. This regulation allows no depreciation unlike the by and large realised book value assets. It ever realises the market value.

  6. If security instruments are considered so there is no inquiry of depreciation every bit long as they trade on active market. So, it should non impact the present regulation as per my sentiment.

  7. Since there was no active market for certain securities therefore inquiring bargainers to utilize certain complex theoretical accounts, premises to find the just value. This created an chance for bargainers to delegate values based on personal involvements supplying misdirecting fiscal statements. [ 2 ]
  8. Harmonizing to my sentiment for those securities which does non hold active market should be provided with a set of guidelines of how to cipher their values and proper revelations in studies. All the houses should obtain an blessing on the manner they are calculated from the organizing accounting organic structures.


    1. Mark-to-market accounting ( May 2010 ) . Retrived on May 16th, 2010 from hypertext transfer protocol: // # Effect_on_subprime_crisis_and_Emergency_Economic_Stabilization_Act_of_2008
    2. Mark to Market tool or problem by Marv Dumon. Retrived on May 16th, 2010 from hypertext transfer protocol: //www.investopedia.


    3. Mark to Market. Retrived on May 16th, 2010 from hypertext transfer protocol: //www.


    1. The highest learning result every bit far as my sentiment is “ Internal controls of a steadfast drama a cardinal factor in the relevancy of fiscal statements ” .
    2. Internal controls had significantly lacks which prevented the sensing of the existent value of loss reappraisal modesty which affected New Century viability into its hereafter. Proper reappraisal militias could hold saved the company from bankruptcy.

      From the position of hearer the proper probe on the identified lacks of internal controls would hold helped to inform direction about the significance of lacks and besides to obtain an sentiment beyond sensible uncertainty.

    3. The relationship between the hearer and client house is of import in understanding, obtaining any relevant information and support from internal hearer and internal audit commission. Auditor should be independent and should keep a good mental attitude and should keep professional agnosticism while be aftering and executing an auditing. The KPMG ‘s hearer ‘s were concerned about the losing their client which disabled their professional agnosticism which they would hold been in normal instance. The hearers went on to proposing an erroneous manner of ciphering reappraisal modesty which boosted the net income in fiscal statements to salve the KPMG relationship with New Century which impaired the independency of hearer.

    4. Prosecuting experient staff for an audit is more of import in obtaining a quality audit. Obtaining adequate grounds before doing a judgement beyond sensible uncertainty is most indispensable, if needed specializer probe study should be exercised. I would state that inexperient staff cost KPMG with hapless quality audits which lead them to confronting a case. The deficiency of apprehension of industry were unable to pick up the mistakes in the internal controls during their 2005 audit the battle squad could non place the lacks in internal controls since they have non reviewed the 2004 working papers/br & gt ; decently before the 2005 audit, which resulted in a misstatements of fiscal statements due to material failings in internal controls.

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