Equity Funding
The case analysis of Equity Funding
Introduction
The collapse of Equity Funding had a far-reaching influence on business practices and institutions. Although it happened over 30 years ago, the lessons from Equity Funding are still meaningful and constructive nowadays. Auditors of Equity Funding failed to collect sufficient evidence, check internal control and substantiate computer system.
The audit premise----- understanding internal control system
AUS 402.41 requires the auditor to obtain an understanding of internal control relevant to the audit. The effective internal control can provide “protection against human errors and reduce errors or irregularities’ (Leung et al, 2007), as well as provide reasonable assurance to auditors for relying on internal control to audit under limit of economic fee. In order to support an opinion on the financial statement, auditors need a sufficient knowledge of internal control, which includes design of policies and procedures of internal control, and then determine whether they are in operation in assessing audit risk and making audit plans. (Leung et al, 2007).
The internal control procedures can be eroded and invalidated resting with management override and collusion. As to EFCA, a considerable amount of personnel involved in collusion. This should have been detected by auditors if they assessed the control environment of the company, including the ethics and integrity of management and employees, and checked whether segregation of duties was carried out.
Unfortunately, the auditors of EFCA poorly understood the internal control procedures in EFCA, especially its computerized accounting system (Lee and Marc, 2002). There were glaring inconsistencies and irregularities in the inter-company accounts of EFCA and its subsidiaries. The auditors should have detected the lack of internal control if they reconcile the parent’s account with subsidiary’s accounts; and the computer fraud would not be hidden long had they kept
Introduction
The collapse of Equity Funding had a far-reaching influence on business practices and institutions. Although it happened over 30 years ago, the lessons from Equity Funding are still meaningful and constructive nowadays. Auditors of Equity Funding failed to collect sufficient evidence, check internal control and substantiate computer system.
The audit premise----- understanding internal control system
AUS 402.41 requires the auditor to obtain an understanding of internal control relevant to the audit. The effective internal control can provide “protection against human errors and reduce errors or irregularities’ (Leung et al, 2007), as well as provide reasonable assurance to auditors for relying on internal control to audit under limit of economic fee. In order to support an opinion on the financial statement, auditors need a sufficient knowledge of internal control, which includes design of policies and procedures of internal control, and then determine whether they are in operation in assessing audit risk and making audit plans. (Leung et al, 2007).
The internal control procedures can be eroded and invalidated resting with management override and collusion. As to EFCA, a considerable amount of personnel involved in collusion. This should have been detected by auditors if they assessed the control environment of the company, including the ethics and integrity of management and employees, and checked whether segregation of duties was carried out.
Unfortunately, the auditors of EFCA poorly understood the internal control procedures in EFCA, especially its computerized accounting system (Lee and Marc, 2002). There were glaring inconsistencies and irregularities in the inter-company accounts of EFCA and its subsidiaries. The auditors should have detected the lack of internal control if they reconcile the parent’s account with subsidiary’s accounts; and the computer fraud would not be hidden long had they kept
Bibliography: 1. Leung, Coram and Cooper (2007) Modern Auditing & Assurance Services, 3rd Edition 2 3. Robert M. Loeffler, 1974, Trustee Report of the Trustee of Equity Funding Corporation of America Pursuant to Section 167(3) of the Bankruptcy Act (11 U.S. C. §567(3)) 4 5. G. Gay and R. Simnett, 2005, Auditing and Assurance Services in Australia, McGraw Hill 6 http://esvc000777.wic023u.serverweb.com/docs/AUS_210.pdf#search=%22AUS%20210%22 (accessed 29/09/2007) 9 10. (accessed 29/09/2007) 11