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
...
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 auditor with higher-quality audit evidence
than is typically available from within the entity. There is a presumption that the auditor will
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