Auditing of the Company Sigma after fundraising by issuing a synthetic financial instrument
DOI:
https://doi.org/10.11606/issn.1982-6486.rco.2020.173343Keywords:
Professional judgment of the auditor, Professional skepticism, Analysis of material misstatement, Audit report, Synthetic financial instrumentAbstract
This teaching case presents a hypothetical situation of a highly leveraged public utility company in Brazil that needs to fulfill a contractual obligation to execute its capital budget – regulatory CAPEX. The company raises funds in the market through a tailor-made synthetic financial instrument and accounts for the transaction to avoid breaching covenants in debt contracts. At the time of the fundraising, the company is close to breaching its covenants. The independent auditor must perform professional judgments and apply the required auditing procedures, particularly regarding the assessment of inherent risk vis-à-vis the incentives from management to provide misleading information and assess the accounting policy that the management has created for the synthetic financial instrument. The auditor must work with skepticism and a questioning mindset to assure a faithful representation of accounting information.
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References
Johnstone, Karla M. et al. Auditing: A risk Based Approach to Conducting a Quality Audit. 10th edition. Boston: Cengage Learning, 2015
Hall, James A. Accounting Information Systems. 7th edition. Ohio: Thomson South-Western, 2011
Graham, Lynford. Internal Control Audit and Compliance. New Jersey: John Wiley & Sons, 2015.
Weirich, Thomas R. et al. Accounting and Auditing Research: Tools and Strategies. 8th edition. New Jersey: John Wiley & Sons, 2014
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