How Does Big 4 Audit Firms Verify S-chips' Cash Balances

[Temperament]

To answer the question,

I dunno.

ADVICE : Avoid all S-Chip no matter how juicy they look. Just like I now avoid all food that is Made in China. Support your local companies. Life will be much simpler.

Agree completely.
And the Honkies have been avoiding food from China since for donkey years already. This i learned from a ex- working colleague who is a Singapore PR from HK since 1997 "mass migration".

[arriyana]

Dont particular agree that all S-Chips are bad. There are many good companies around that worth looking at.

In fact, when there are many scandals, it is more likely that the share prices are overly depressed, hence good value.

[maximillian]

[quote='minimax' pid='72972' dateline='1391408192']

Regards your question to point 2, you are refering to a fraud case. Generally auditors have an analytical procedure on the FS to detect this. But they only gives a reasonable assurance and not a perfect assurance.

Hi,
thanks for your reply.

Care to enlighten us on what analytical procedures on the FS auditors are using?

Anyway, my understanding is that in order to fake cash balances and fool the auditor, management must:

1) corrupt the bank reconciliation process by faking bank statements
2) corrupt the bank confirmation process by getting someone inside the bank to fill in the cash balance figure desired by management in the bank confirmation form.

I've attached a sample of a bank confirmation form for those who wonder what a bank confirmation form looks like.

In a nutshell, Accounting has two 'legs',Debit n credit. Whatever transaction does into the bank will have another side in another assertion. Auditors has many methods of analytically procedure. One example is to compare one assertion with another that are related. E.g revenue when compare with past year increase by 50%, yet cost of sales only increased by 10%. The risk is revenue are overstated/cost understated, therefore reported a higher gross margin. The auditor will then investigate and narrow the focus onto that assertion. Hope i am not getting too technical here.

We as an investor are unable to detect this, coz we can't ask the company. One of the issue that we face is the transparency of the company that we would like to invest in. Take world com like what temperament has quote as an example. The transparency issue led US later to pass down the sarbanes-oxley act.

Problem with us is that our FS are not audited every quarter. S-chips have some known reputation for their transparency issues. And even if its audited, like what valuebuddy mention, PRC auditors are paid to verify since the company and their documents are in china.

I remember there was a news that US stop china's big four unit to audit the company listed on US coz they refuse to hand over some documents.. Said it was state secret. Something like that.
ref:
http://mobile.reuters.com/article/idUSBR...3?irpc=932

[CityFarmer]

In a nutshell, Accounting has two 'legs',Debit n credit. Whatever transaction does into the bank will have another side in another assertion. Auditors has many methods of analytically procedure. One example is to compare one assertion with another that are related. E.g revenue when compare with past year increase by 50%, yet cost of sales only increased by 10%. The risk is revenue are overstated/cost understated, therefore reported a higher gross margin. The auditor will then investigate and narrow the focus onto that assertion. Hope i am not getting too technical here.

We as an investor are unable to detect this, coz we can't ask the company. One of the issue that we face is the transparency of the company that we would like to invest in. Take world com like what temperament has quote as an example. The transparency issue led US later to pass down the sarbanes-oxley act.

Problem with us is that our FS are not audited every quarter. S-chips have some known reputation for their transparency issues. And even if its audited, like what valuebuddy mention, PRC auditors are paid to verify since the company and their documents are in china.

I remember there was a news that US stop china's big four unit to audit the company listed on US coz they refuse to hand over some documents.. Said it was state secret. Something like that.
ref:
http://mobile.reuters.com/article/idUSBR...3?irpc=932

The news was posted before in other thread. I would like to post one more related news here, to add-on to maximillian's post

No hiding behind state secrecy laws, China officials told

BEIJING — China has unveiled new rules telling officials not to cover up what should be publicly available information using the excuse that it is a state secret, in what the state media said was a move towards greater government transparency.

China has notoriously vague state secret laws, covering everything from the number of people executed every year to industry databases and even pollution figures, and information can be retroactively labelled a state secret.

Chinese officials, particularly at the local level, often seek to invoke secrecy laws to prevent embarrassing problems that could lead to punishment, such as police brutality or pollution, from being reported to more senior officials.
...
http://www.todayonline.com/chinaindia/ch...cials-told

[valuebuddies]

Bottom line is that auditors are not fraud detectors, whatever you feed them they eat, auditors shall not consider as negligence if they have conducted the audits in accordance to SSA. If the directors corrupt the bank, provides fake documents to auditors, generate fake bank statements; the auditors shall not be liable if these frauds discovered subsequently because the auditors are not aware in the first place. Auditors express opinions on whether a financial statements are "true and fair", but not "correct and free from frauds"

[Temperament]

Bottom line is that auditors are not fraud detectors, whatever you feed them they eat, auditors shall not consider as negligence if they have conducted the audits in accordance to SSA. If the directors corrupt the bank, provides fake documents to auditors, generate fake bank statements; the auditors shall not be liable if these frauds discovered subsequently because the auditors are not aware in the first place. Auditors express opinions on whether a financial statements are "true and fair", but not "correct and free from frauds"

Many people don't know what you say is true. but if you go and read Enron and WorldCom, you will understand better.

[valuebuddies]

In both cases, Arthur Andersen are guilty because they knew and they concealed the truths.

[Temperament]

In both cases, Arthur Andersen are guilty because they knew and they concealed the truths.

Exactly! It seems for either way how the Auditors behave, we are always on our own.

[minimax]

Bottom line is that auditors are not fraud detectors, whatever you feed them they eat, auditors shall not consider as negligence if they have conducted the audits in accordance to SSA. If the directors corrupt the bank, provides fake documents to auditors, generate fake bank statements; the auditors shall not be liable if these frauds discovered subsequently because the auditors are not aware in the first place. Auditors express opinions on whether a financial statements are "true and fair", but not "correct and free from frauds"

Yes, you are right. But nobody wants the "true and fair" disclaimer to be a get-out-of-jail-free card for auditors either.

That's why SSA 240 states that:
"The auditor should maintain an attitude of professional scepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience with the entity about the honesty and integrity of management and those charged with governance."

[arriyana]

But you do have to understand that audit is a very time consuming and manpower consuming business. To identify fraud will take substantially more effort and cost to detect and uncover them.

Problem with the audit industry now is even shareholders are unwilling to folk out big sums of money to afford a proper audit. How can one expect auditors to stand by the shareholders side then?