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cool, macho frat party gut ivited to this really uclean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise ond scandiaious Cynthia |. Smith, Lorna McDougal, and William R. Yeack, Inside Arthur ethany or of Enron (New York: Penguin Group, 2003), p. 145. Fall of Enron (N ARTPHONE F Saddle River, Nl: Prentice Hall, 2003), p. 126. Thot Destroyed Faith in Corporate America (New York: HarperBusiness, 2003), p. 289. s sthny McLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Andses s smith and John R. Emshiwiller, 24 Days: How Two Wall Street journol Reporters Uncovered - Revie e Vider u Fall of Enron (Penguin Group, 2003), p. 146. cRoberts, \"Ties to Enron Blinded Andersen,\" Chicago Tribune, September 3, 2002 Scandalous Accessed from Factiva (February 3, 2004). Case Questions 1. Consult PCAOB Ethics and Independence Rule 3520. What is auditor independence, and what is its signi difference between independence in appearance and independence in fact? ficance to the audit profession? What is the 2. Refer to Section 201 of SARBOX. Identify the services provided by Arthur Andersen that are no longer allowed to be performed. Do you believe that Section 201 was needed? Why or why not?

Solution

answer 1 - Independence of auditor means an auditor has unrestricted access to the books of accounts, records and documents of the auditee and his right to carry out audit as per the auditing standard and professional ethics is not restricted.

The opinion of the auditor must not be influnced by the auditee in any unauthorised manner.

Independence in appearance means the auditee shows that the auditor is not under any influence to differ his/her opinion in any possible manner by auditee. The auditor is free to carry out work independently.

Independence by fact means the auditor is genuinely independent to report and state his opinion without any influence. This can be established by auditor himself.

Answer 2 - section 201 of sarbox states the activites which could not be performed by auditors and outside their scope whcih states a list of prohibited activities for auditors like

bookeeping or other services related to accounts maintenance

fnancial informaton system designing and implementation

acturial service

internal audits

management functions

legal services

broker services etc

Answer 3 - Section 203 states that the audit partner must be roatated in every 5 years and he shall not be appointed during the cooling period of 1 year as per section 206.

yes section 203 and 206 could have impacted enron audit as the relationship between tha auditor and auditee was such due to which independence of auditor was hampered. and if enron had followed section 206 then auditor would not have been appointed during the cooling period gets over.

Answer 4 - section 301 states that public cos must have audit committees. this audit commitee monitors the work done by auditors and reports to the top management. Yes this section is important to maintain independence between client and auditor and it act as middle layer and monitors all the work done by auditor and removes conflict between the auditor and the comapny.