A study of auditing within Xerox

Category: Accounting

Q5: some people will argue that KPMG inappropriately subordinated its judgments to Xerox preferences. First of all we should notice that all the actions from KPMG are irregularities. Because it against several auditor objectives and responsibilities. From ASA 200 requires "that an audit should to provide reasonable assurance of detecting material misstatements in the financial report arising from fraud or error." (Arens,Best, Shailer,Fiedler,Elder and Beasley. 2010) And the primary objective of the audit is to express an opinion on the financial statements. Auditor should disclosing or declaring any impairment to independence or objectivity that may exist, and

completing assigned tasks in a timely, thorough accurate and well-documented manner. Which KPMG personnel questioned the appropriateness manipulations but they did not persuade management to change accounting practices. Auditors must avoid making false, unsupported or misleading statements that tend to injure or discredit the audited organization's reputation. To avoidance all those impropriety mistake, the company can use several advices blew:

Audit firms should develop or expand training for auditors at all levels oriented toward responsibilities and procedures for fraud detection. These programs should emphasize interviewing skills and the exercise of professional skepticism, as well as testing techniques.

The audit firms may require more experienced staff. Accounting firms should staff all engagements with qualified staff with high competence, technical knowledge and low inherent risk. However for low acceptable audit risk client, special care is appropriate in staffing and the importance of professional skepticism should be emphasized. At mean time audit firms should more effectively teach the concept of professional skepticism.

The firms will be reviewed and supervised more carefully than usual. Accounting firms need to ensure adequate review of audit files than document the auditor's planning, evidence accumulation and conclusions and other matters in the audit. When acceptable audit risk is low, more extensive review is often warranted including a review by personnel who were not assigned to the engagements. However, auditing standards needed to provide better guidance on how to implement the concept.

Auditors clearly are responsible for exercising effective professional skepticism. The corporate behavior also plays a significant role in auditor skepticism. Audit firms and audit partners should not fear removal from their role if they challenge management strongly. Management and audit committees have a responsibility for ensuring that the corporate culture and environment is one that encourages open dialogue with their auditors at all levels.

Q6: the first questionable accounting manipulation is acceleration of lease revenue recognition from bundled leases. This manipulation will affect revenues account, because Xerox accelerated the lease revenue recognition by allocating a higher portion of the lease payment to the equipment instead of the service or financing activity. By reallocating revenues from the finance and service activity to the equipment, Xerox was able to recognize greater revenues in the current reporting period instead of deferring revenue recognize to future periods. There are two auditor procedures can suit for this environment. First is use internal procedure, recalculation: checking the mathematical accuracy of documents or records. Second it external procedure, confirmation: the process of obtaining a representation from a third party.

For questionable accelerated of lease revenue from lease price increase & extensions, increase in the residual values of leased equipment and acceleration of revenues from portfolio asset strategy transactions. All those three manipulation will increase revenue account and income statement. Because in short term it will immediate increase reverse, but it sacrifice the long term profit. To protect company long term profit, auditor should observation all the processes and procedure the performed. On the other hand auditor should re-performance, it means the auditor's independence execution of procedures previously performed by entity staff.

For questionable manipulation of reserves. This manipulation will affect equity account. Because Xerox established an acquisition reserve for unknown business risk and unrelated business to the reserve account to inflate earning. It means Xerox put money in equity account to prevent potential risk, but it unrelated to expenses. It easy causes fraud. Auditor can use observation procedure, to looking at processes and procedures being performed or use inquiry procedure, to seeking information from knowledgeable persons.

For questionable manipulation of other income. This manipulation will affect cost and expenses account. Because Xerox elect to recognize most of the interest income during period years. The cost and expenses account will reduce in period years, and meantime make that year's report look better. To appropriateness of this practice, audit should use analytical procedure. Compare the date with similar prior-period date, to keep the report justice.

For questionable failure to disclose factoring transactions. This manipulation will affect revenues account and asset account. From material, we can know Xerox sold future cash from receivable account to local banks for immediate cash. It made Xerox have a strong cash position in the present year, like the revenues account will increase, on the other hand sold receivables to bank must take some lost. The asset account must decrease. It also easy cost fraud. Audits can use inspection of tangible assets and analytical procedures. Inspection of tangible assets can find out the total asset increase or decrease. Xerox company failure to disclose factoring transaction should record in annual report, so use analytical procedure will disclose this problem.