Satyam Fraud Case- Implication of Bank Confirmation / Bank Certificate

Subsequent to our previous post of " Saytam Fraud Case- Misrepresentation of Cash" , our further examination reveals that the misrepresentation pertains to misrepresentation of the Company's Fixed Deposit. The CEO, Raju, is personally in charge of the Fixed Deposit! An improper segregation of duties ( improper corporate governance) has given the CEO committed the fraud.

Investigation into the fraud case is on-going, and media widely reported that the investors are questioning what audit procedures have the Stayam auditor, Pricewaterhouse Coopers performed to ensure the existence of the asset.

The implication of Satyam Fraud Case highlited the importance of obtaining independent bank confirmation from the bank directly. No audit engagement should be closed without obtaining the bank confirmation as an audit evidence. Bank confirmation replies will also reflect any contingent claims by the bank towards the entity. As such, the auditors can ensure the completeness of the disclosure of Company's contingent liabilities.

In short, an independent bank confirmation / cash certificate is an important audit evidence, as evident in Satyam's fraud case.

Satyam's Fraud Case- Misrepresentation of Cash

Recently, the profession is hit by the significant fraud case involving India's IT Giant- Satyam. Satyam admitted that he has committed fraud, part of the action includes: inflating cash and bank balances by $1 billion dollar!!!

The professions are wondering how could the auditor miss out such a huge misrepresentation in cash and bank balance. In general, audit procederes include:

- agreeing cash and bank balance per Trial Balance amount to Bank Statement
- most importantly, obtaining bank confirmation directly from the client's banker

The confirmations and bank statements provide a certain level of audit comfort zone, given that it's an independent party confirmation, rather than client-generated evidence.

Nevertheless, Pricewaterhouse Coopers, who are the auditor for Satyam Computer Services Ltd, claims that the audits were conducted in accordance with applicable auditing standards and were properly supported by audit evidence. Apparently, the fraud cannot be easily discovered by obtaining bank confirmation. If not, it wuld have been discovered, given that Pricewaterhouse Coopers has been the auditor of Satyam for several years.

We shall wait for further news / reports then.

#68 Evaluation of Doubtful Debt

Subsequent to the topic of #67 Identification of Doubtul Debt, we would like to proceed further on how to evaluate the exposure to doubtful debt. A very critical question to ask: Does all long outstanding debt represents doubtful debt, for which the provision need to be provided for ? The answer is very subjective, and involved a lot of professional judgement.

Let's start the evaluation with asking our readers a few scenarios as below:

[Scenario A] XYZ Company has outstanding amout due from Company A (aged > 90 days), who is long standing customer of XYZ Company for the past 10 years with no history of default in repayment. The long outstanding amount is attributable to the slow-repaying from Company A.

[Scenario B]XYZ Company has outstanding amount due from Company B(aged > 90 days), who is long standing customer of XYZ COmpany for the past 20 years with no history of default in repayment. Company B usually paid the amounts on time. There is no dispute involved in the outstanding amount due from Company B.


We invite our 'Accouting & Auditing blog' readers to evaluate the recoverability of outstanding amount due from Company A and Company B respectively.

#67 Identification of Doubtful Debt

How do we identify potential doubtful client while performing audit ?

We have to identify the doubtul receivable before assessing the potential provision for doubtful debt for respective client. Be noted that, provision for doubtful debt should be assessed on a specified basis. General provision is no longer allowed in IAS 39. IAS 39 requires existence of objective evidence of impairment on doubtful receivable. General provision does not take into consideration of any evidence.

Let's come back to the topic on how do we identify slow moving debtors step-by-step:

1. Obtained trade debtor aging listing ( by customer) as at the balance sheet date
2. Pay attention to debtors who have outstanding debts overdue more than 60-90 days
( the number of days could be changed according to the industry norm)
3. Selected the debtors ( with significant outstanding long outstanding debts according to the audit materiality of the engagement

In short, we analyze the debtors who has: 1) long outstanding balance ( generally overdue more than 60- 90 days) and 2) the long outstanding balance is considered material for the purpose of audit.

#66 Audit Evidence- Company's Minutes & Resolutions

Reviewing Company's Annual General Meeting minutes & resolutions, Directors' Meeting minutes & resolutions, Audit Committee Meeting minutes & resolutions is part of the audit work steps.

By reviewing the Company's minutes & resolutions, the auditor will be able to know the latest development / recent changes to the Company's financial and operational positions. Changes in business directions will be discussed over the Company's meetings and documented accordingly.

Hence, the Company's minutes & resolutions serve as a good audit evidence for auditor to gain understanding of the Company's business and it should be filed in appropriately.

The auditors, usually, will visit the Company's corporate secretary office to obtain the Company's minutes & resolutions.