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Case 4.7 - Satyam Computer Services Limited-All Answers Correct

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Case 4.7 – Satyam Computer Services Limited 1. The Satyam auditors attempted to confirm both cash and accounts receivable balances with external parties. Which of the audit assertions for cash and accounts receivable would confirmations be most relevant? The most relevant audit assertions for confirmation of cash and accounts receivable are probably existence and accuracy, but completeness, rights and obligations, valuation, and disclosure and presentation are also important (AS 2310.11). 2. Research PCAOB auditing standards (which can be found on the PCAOB’s website) related to the use of confirmations and document the specific requirements related to maintaining control of the confirmation process. a. Based on what you learn, provide an assessment of deficiencies in the confirmation approach Satyam’s auditors took related to cash and accounts receivable. AS 2310.04 defines confirmation as the “process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” (italics added). The process requires selecting the sample of items to be requested, crafting the confirmation request, communicating the request directly to the third party, obtaining the response directly from the third party, and evaluating the provided information. Based on this information, the approach that Satyam’s auditors used is deficient in two main ways. First, the engagement team was tasked with the responsibility of requesting confirmations from the third parties and receiving the confirmations before they reached the auditors. These requests should have come directly from the auditors, and the confirmations should have been sent directly to the auditors. Second, the confirmations that the auditors did receive directly from the banks reflected significantly smaller cash balances than Satyam management asserted. In fact, management claimed the company had $176 million of fixed deposits at a certain bank, while the bank-provided confirmation indicated the company had no fixed deposits with the bank whatsoever. Instead of investigating these differences, however, the engagement team did not perform any reconciling procedures. Perhaps the engagement team assumed that verifying subsequent cash receipts would be enough to reconcile these differences, but this testing was faulty as well. Even worse, there were some instances in accounts receivable where the auditors received no responses to confirmation requests at all, but they still made no attempt to follow up on these instances. b. Do auditing standards require the use of confirmations in the audits of cash balances and accounts receivable balances? While there is no requirement that auditors request confirmation for cash balances, this practice is typically performed in most audits. Confirmation of accounts receivable is a generally accepted auditing procedure (AS 2310.34). It is required because it is generally presumed that evidence obtained from third parties will provide the au

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