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Audit case studies: lessons from real-world audit failures and success stories

If you’re an auditor, you’ve probably achieved your fair share of success stories – perhaps ...

By Tom Edwards & Yasmin Wilks

If you’re an auditor, you’ve probably achieved your fair share of success stories – perhaps you’ve witnessed a few failures too.

As the saying goes, we learn from our mistakes, and audit case studies, both failures and successes serve as valuable insight. Real-life audit examples provide us with lessons on what to do and what to avoid, enabling organisations to improve their audit processes. 

Ready to discover some real-world examples? Here’s our pick of a few high-profile cases…

When things go wrong

(1) enron corporation.

The Enron scandal and the subsequent collapse of the Enron Corporation serves as a stark reminder of audit failure and corporate misconduct. Possibly the most high-profile scandal ever unearthed, the Sarbanes-Oxley Act (SOX) of 2002 was passed as a result of scandals such as this, WorldCom, Tyco, and Global Crossing.

Enron's auditor Arthur Andersen was heavily criticised for failing to detect fraudulent financial reporting. And lots of lessons can be learned from this example.

Firstly, Enron’s case highlights the importance of auditors maintaining independence from the companies they audit to ensure unbiased assessments. But it also reminds us of the importance of whistle-blower protection – where there are safeguards in place, organisations will encourage openness and provide the confidence for individuals discovering financial irregularities to expose them. And Enron finally emphasises how crucial regulatory oversight is in holding auditors accountable and preventing corporate fraud.

(2) Toshiba

We’ve all heard of Toshiba , a renowned multinational conglomerate, manufacturing a wide variety of consumer and business products. Despite the company’s famous success, this chapter of their story is not one of their finest.

In July 2015, Toshiba experienced an internal audit failure that spotlighted the gap between good corporate governance structure and its practical implementation. It led to Toshiba Corp’s president, Hisao Tanaka, and his two predecessors quitting after investigators found that the company had inflated earnings by $1.2 billion between 2009 and 2014.

Regardless of a sound governance structure, the organisation suffered from a massive financial scandal, highlighting the importance of proactive internal auditing to identify and prevent financial irregularities.

(3) Ernst & Young

Even the largest professional services companies are sometimes at the centre of an audit scandal. And in the case of Ernst & Young , these kinds of scenarios serve as a reminder of the importance of a robust auditing process for even the biggest of players.

EY was fined $11.8 million for audit failures in 2016. USA regulator SEC found that EY’s audit team repeatedly failed to detect fraudulent activity for more than four consecutive years. Additionally, it was reported that EY’s team failed to take effective measures in minimising known recurring tax-related problems.

This case emphasises the critical role auditors play in scrutinising high-risk areas and addressing known deficiencies. And underscores the importance of due diligence and thoroughness in audits.

(4) WorldCom

The WorldCom scandal is another example of a colossal audit failure. Arthur Andersen, the same auditor implicated in the Enron scandal, failed to detect a massive accounting fraud at WorldCom.

What can we learn from this tale? Well, attentive auditing is essential, and auditors need to exercise a blend of vigilance and scepticism when assessing financial statements. This example also points to ethical responsibility, underscoring auditors’ moral and ethical duty to report financial irregularities.

Like Enron, WorldCom’s case was instrumental in regulatory reforms, like the Sarbanes-Oxley Act which increased corporate accountability.

Getting it right

(1) apple inc.

Tech giant Apple is widely recognised for its financial transparency and internal controls. Their financial audits consistently reflect strong performance and accountability. Key takeaways from Apple's success include their transparency – Apple publishes detailed financial statements and reports that are easily accessible to the public, building trust with investors and stakeholders. They also have a set of robust internal controls and processes in place, minimising the risk of financial mismanagement or fraud.

The organisation’s MD Tim Cook says , “We do the right thing, even when it’s not easy.”

(2) Microsoft

Microsoft's another great example of a business with transparency and accountability at its core. The tech leader has consistently demonstrated exemplary corporate governance and financial reporting .

Their success highlights several valuable lessons, including the significance of disclosure. Microsoft provides comprehensive financial disclosures, offering investors a clear picture of their financial health. And they’ve also got their finger on the pulse when it comes to  risk management , with practices in place that have been instrumental in ensuring long-term financial stability.

Microsoft carries out consistent and regular financial audits , to maintain trust and transparency with all of their stakeholders.

(3) Johnson & Johnson

Johnson & Johnson's another example of a profound commitment to transparency . The healthcare multinational is renowned for its sense of responsibility when it comes to ethical conduct.

Key takeaways include their strong ethical leadership – an essential asset for fostering a culture of compliance and accountability.

They also boast hardy compliance programs , proving that investing in this area can help detect and prevent financial misconduct. Stakeholder communication is another factor in Johnson & Johnson’s audit success, and open comms are encouraged to build trust and confidence.

What can we learn from all these case studies? The need for thoroughness, vigilance, transparency, ethical leadership, and continual improvement in auditing are essential. They emphasise the importance of not just having a good corporate governance structure, but also ensuring its effective implementation. And by learning from both successes and failures, we can strive to build a corporate environment that prioritises (financial) integrity and compliance with relevant regulatory, legal, and industry standards – and, of course foster trust and prevent costly failures.

Are you  looking for high-calibre talent  with the skills to protect you from audit mishaps?  Let’s chat  about your needs. Or perhaps you’re an  audit professional  looking to help companies grow their audit capabilities? If you’re looking to progress your career and safeguard an exciting, growing business,  get in touch , or check out our  latest roles . 

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The first article in this series of two on Paper P7 case study questions discussed question style, what to look for in the requirements, how higher-level skills are tested, and the meaning of professional marks within a question requirement. This second article goes through part of a typical Section A case study question, applying the recommended approach described in the previous article. This approach comprises four stages.

Stage 1 – understanding the requirement

The first thing to do is to read and fully understand the question requirement. Here is the requirement we will be looking at in this article:

‘Prepare a report, to be used by a partner in your firm, in which you identify and evaluate the professional, ethical, and other issues raised in deciding whether to accept the appointment as provider of an assurance opinion as requested by Petsupply Co.’ (12 marks)

Note: this requirement includes two professional marks.

Having read the requirement, break it down. You are asked to do two things:

• identify, ie state from the information provided
• evaluate, ie discuss from a critical point of view.

The requirement asks you to consider ‘professional, ethical, and other issues’. This could cover a wide range of considerations, such as:

• ethics: independence, competence, conflicts of interest, confidentiality, assessing integrity
• professional issues: the risk profile of the work requested, the fee – and whether it is sufficient to compensate for high risk, availability of staff, managing client expectations, logistical matters such as timing, legal and regulatory matters – such as money laundering, and (in some cases) obtaining professional clearance
• other issues: whether the work ‘fits’ with the commercial strategy of the audit firm, the potential knock-on effect of taking on the work – such as the impact on other clients, or on other work performed for this client.

You are asked to produce a report, so remember that the professional marks available will be awarded for using the correct format, the use of professional business language, and for presenting your comments as a logical flow culminating in a conclusion.

From reading the requirement, you know that the question scenario will be based on a potential assurance assignment and will be broadly based around acceptance issues.

Stage 2 – reading the scenario

When reading through the detail of the scenario, you should now be alert to information relevant to this requirement. Highlight important points that you think are relevant to the scenario and remember to focus on issues that could affect your acceptance of a potential assurance assignment.

Now read the following extract from the scenario and highlight the salient points – remember to look out for any factors relevant to the ethical, professional, and other issues described above.

Extract: You are a senior manager in Dyke & Co, a small firm of Chartered Certified Accountants, which specialises in providing audits and financial statement reviews for small to medium-sized companies. You are responsible for evaluating potential assurance engagements, and for producing a brief report on each prospective piece of work to be used by the partners in your firm when deciding whether to accept or decline the engagement. Dyke & Co is keen to expand the assurance services offered, as a replacement for revenue lost from the many small‑company clients choosing not to have a statutory audit in recent years. It is currently May 2007.

Petsupply Co has been an audit client of Dyke & Co for the past three years. The company owns and operates a chain of retail outlets selling pet supplies. The finance director of Petsupply Co recently communicated with your firm to enquire about the provision of an assurance report on data provided in the Environmental Report published on the company’s website. The following is an extract from the e-mail sent to your firm from the finance director of Petsupply Co:

‘At the last board meeting, my fellow directors discussed the content of the Environmental Report. They are keen to ensure that the data contained in the report is credible, and they have asked whether your firm would be willing to provide some kind of opinion verifying the disclosures made. Petsupply Co is strongly committed to disclosing environmental data, and information gathered from our website indicates that our customers are very interested in environmental matters. It is therefore important to us that Petsupply Co reports positive information which should help to retain existing customers, and to attract new customers. I am keen to hear your views on this matter at your earliest convenience. We would like verification of the data as soon as possible.’

You have looked at Petsupply Co’s Environmental Report on the company website, and found a great deal of numerical data provided, some of which is shown below in Table 1.

Table 1: Petsupply Co's environmental report – numerical data

Stage 3 – take time to think about the requirement and the scenario

As discussed in the previous article, you must take time and not rush to answer. When evaluating this particular scenario try to think widely about the information provided. Your answer should cover a broad range of issues rather than concentrating on one or two. Your comments must be tailored to the scenario. It is pointless, for example, to write about a general acceptance issue which is not specifically related to Petsupply Co.

It is important to appreciate that few marks will be available for stating the issue. The higher-level skill marks in this question will be awarded for a discussion of why the issue is relevant to the decision about whether or not to provide the assurance service to Petsupply Co. The requirement is to evaluate the scenario and therefore it is crucial to demonstrate an appreciation that there may be two conflicting sides to the discussion.

Table 2 shows an example of a thought process which identifies the issues and explains why each issue is relevant to the requirement; the issues are shown in the order in which they appear in the question.

Table 2: Example of a thought process which identifies issues and shows relevance to the requirement

Table 2 is not an answer, it is a thought process. This is what you should be thinking about after reading through the scenario. The previous article stressed the importance of thinking through the scenario. It may help to jot these ideas down in an answer plan before making a start on your written answer, as this will help you to prioritise the points and give the report a logical flow.

Stage 4 – writing the report

The requirement states that two professional marks are available. As discussed in the previous article, these marks are not for the technical content of the answer, but for the way the relevant points are communicated. The report will be evaluated on the following:

• Use of a report format – a brief introduction, clear separate sections each discussing a different point, and a final conclusion.
• Style of writing – the report is addressed to the partner and so language should be appropriate. You do not need to explain things that would be obvious to a partner, and you must be tactful.
• Clarity of explanation – make sure that each point is explained simply and precisely, and avoid ambiguity.
• Evaluation skills – demonstrate that each point may have a positive and a negative side.

Remember, when answering any question requirement it is quality not quantity that counts. You should make each point succinctly and remain focused on the specific requirement. Questions can be time pressured, but it is important to remember that you should be able to read the requirement, think about it, and write an answer in the time available. This means that there is only a limited amount of time available for actually writing the answer, so keep it short and to the point. Irrelevant waffle earns no marks and will detract from the professional skills evaluation. What follows is an outline report format for this requirement:

Introduction

• Report is internal, addressed to a partner, covering proposed assurance service for existing audit client

Section 1 – ethical matters

• Provision of non-audit service
• Impact on total fee from client
• Competence to perform work – specialised engagement

Section 2 – risk-related matters

• High inherent risk – figures prone to manipulation
• Data highly subjective
• Need to rely on systems put in place by client

Section 3 – commercial matters

• Fee will have to be high enough to compensate for high risk
• Fee may need to compensate for specialists if used
• Strategic fit – assignment in line with commercial goals of Dyke & Co
• Build up experience in non-audit service
• Ascertain whether assignment will be recurring

Section 4 – other matters

• Managing client expectation regarding type of opinion sought
• Managing client expectation regarding timeframe
• Summary of key issues and decision on acceptance

Note: not all of the above points are necessary to secure a pass mark; the marking scheme is also flexible enough to cater for comments that may not appear in the ‘model answer’.

This article shows how to approach one requirement from a typical Section A question in Paper P7. It is important to practise technique by attempting as many questions as possible, starting with the Pilot Paper for Paper P7.

Written by a member of the Paper P7 examining team

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▫️ Lesson 5.1: Case Studies and Simulations

Lesson 5.1: case studies and simulations in auditing.

Welcome to Lesson 5.1 of the Reflect Audit Academy. This lesson shifts our focus towards the practical application of everything we've learned so far through Case Studies and Simulations. Think of this part as the real-world test drive of a car you've been learning about and building. It's where theory meets practice, and you get to see how the principles of auditing apply in real-life situations or simulated environments that mimic those situations closely. Let's break down what this entails in simpler terms.

Understanding Case Studies

Case Studies in auditing are like stories based on real-life scenarios or complex situations that businesses have faced. They're detailed accounts that include the company's background, the challenges it encountered, the auditing process it underwent, and the outcomes of those audits.

Learning Objective: Each case study is designed to teach specific lessons, whether it's about identifying fraud, assessing risk, or applying certain auditing standards.

Engagement: By engaging with these stories, you'll learn to navigate complex scenarios, make decisions based on incomplete information, and understand the consequences of those decisions.

Exploring Simulations

Simulations, on the other hand, are like virtual labs where you get to play the role of an auditor. You're given a set of data, tools, and a scenario, and you must conduct an audit as if you were dealing with a real company.

Hands-On Experience: Simulations provide a safe environment to apply auditing techniques, use auditing software, and practice decision-making without the risk of real-world consequences.

Feedback and Learning: Most simulations offer immediate feedback on your decisions, allowing you to learn from mistakes and understand the reasoning behind best practices.

Why Case Studies and Simulations?

Practical Application: They allow you to apply theoretical knowledge in scenarios that simulate real-world complexities.

Critical Thinking: Both case studies and simulations challenge you to think critically, analyze data, and make informed decisions.

Experience: They offer invaluable experience in handling diverse situations, which is critical for any auditor.

Implementing a Case Study: A Simple Example

Imagine a case study based on a fictional company, "TechGadget Inc.," which faced significant inventory discrepancies. The case study outlines the company's operations, its inventory process, and the initial findings that suggested discrepancies.

Your Role: As the auditor, your role is to identify the root cause of the discrepancy. You'll need to review financial records, interview staff, and assess inventory management practices.

Learning Points: Through this case study, you'll learn about the importance of internal controls, the potential for fraud, and the auditor's role in identifying and recommending solutions to such issues.

Running a Simulation: A Simple Scenario

Consider a simulation where you're tasked with auditing the cybersecurity measures of a small bank. You're provided with the bank's cybersecurity policy, access logs, and recent incident reports.

Your Task: Your goal is to assess the bank's compliance with cybersecurity standards, identify vulnerabilities, and test the effectiveness of its incident response.

Feedback Loop: As you make decisions (e.g., which areas to focus your audit on), the simulation provides feedback on the impact of your choices, helping you learn about prioritizing risks and effective auditing techniques.

Wrapping Up

Case Studies and Simulations are crucial tools in the auditor's learning journey, offering a bridge between textbook knowledge and the realities of the auditing profession. Through these methods, you'll gain insights into the intricacies of auditing work, develop problem-solving skills, and build confidence in your ability to navigate complex auditing challenges. As we explore these case studies and simulations, remember, each one is an opportunity to hone your skills and prepare for the dynamic world of auditing.

Last updated 7 months ago

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Case study #1, sox compliance – auditing expertise and resources provided to a pharmaceutical company.

An SEC-registered pharmaceutical public company and large accelerated filer with revenue increases from approximately $150 million to $600 million in 3 years required additional internal auditing expertise and resources to meet new and changing compliance and internal control requirements. READ FULL STUDY >>

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Merger and sap implementation – accounting expertise, resources and an interim controller required by an electronic material manufacturer in the electronics industry.

A manufacturing company with significant revenue growth over several years and approximately $500 million in revenue was implementing an SAP system and required additional accounting resources and an interim controller during the implementation project and after.  READ FULL STUDY >>

Case Study #3

Sap implementation – accounting resource and project management leadership for a medical imaging products manufacturer .

A privately held US manufacturing company of medical imaging products with approximately $1 billion in revenue with offices in Delaware, Europe, Australia and Japan was implementing SAP and required an interim management resource to assist with the FI module configuration and testing and with project management of the implementation and training efforts in Sydney, Australia.  READ FULL STUDY >>

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Internal controls expertise, training and project planning for an oil company.

An African oil company with approximately $12 billion in revenue and multiple subsidiaries wanted to provide in-house training to approximately 50 key accounting and audit executives and managers. The Company also required assistance developing a Company-wide internal control project implementation plan.  READ FULL STUDY >>

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Outsourced sox compliance and internal audit expertise for a real estate management company.

An SEC-registered real estate public company with approximately $15 million in revenue required outsourced internal auditing expertise to handle all compliance and internal control requirements. The company had limited accounting personnel and required best practices in implementing COSO and control monitoring solutions.  READ FULL STUDY >>

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Implementation of it policies, procedures, and controls for a pharmaceutical manufacturing company.

A public company in the pharmaceutical industry experienced significant growth over several years and required enhanced IT policies and procedures and adoption of a security and availability controls framework.  READ FULL STUDY >>

Case Study #7

Soc 2 audit for an it managed services provider.

A large customer of an IT service organization providing outsourced managed services required an SOC 2 audit. READ FULL STUDY >>

Case Study #8

It sox controls documentation for european pharmaceutical company.

A large privately owned European pharmaceutical company with over $3 billion in revenue and limited experience with SOX compliance in the USA required audit expertise to document IT controls relative to IT operations for a division being purchased by a US company. READ FULL STUDY

Case Study #9

Reconciliation project leadership, expertise and resources provided to a nationwide bank.

A large public company financial institution with over $11 billion in assets and approximately $800 million in revenue had a breakdown in reconciliation procedures for automated processing of transactions by an outsourced processor. The Bank required expertise and resources to resolve control weaknesses and investigate unreconciled prior year processing errors and irregularities.  READ FULL STUDY

Case Study #10

Sox and internal control project management leadership and resources provided to an energy company.

A large public energy company with $6 billion in revenue and multiple subsidiaries was required to document and implement internal controls throughout the company and at various locations for Sarbanes Oxley (SOX) requirements.  READ FULL STUDY

Case Study #11

Audit expertise and resource for a regional water company.

A local public water company, with $77 million in revenue and $431 million in assets, acquired property and certain equipment pursuant to an acquisition agreement with a local municipality. Management required an independent auditor to perform steps to ensure certain aspects of the agreement were adhered to and reports provided were reliable.  READ FULL STUDY

Case Study #12

Compliance assistance and resource provided to a world wide bank operating in delaware.

A worldwide bank with operations in Delaware required assistance with strategic planning and research efforts relating to compliance with the Community Reinvestment Act (CRA). The Delaware bank has assets approximating $28 billion and interest and other revenue of $2.8 million.  READ FULL STUDY

Case Study #13

Outsourced sox services provided to an sec public company.

An SEC-registered public company on the verge of bankruptcy required outsourced internal auditing expertise to handle all compliance and internal control requirements. The company had limited resources and accounting personnel and required an efficient approach to ongoing Sarbanes Oxley (SOX) Compliance efforts.  READ FULL STUDY

Case Study #14

Document procedures, risks and controls for a manufacturing division of a large public company. assist with accounting for carve out transaction.

A large public company helicopter manufacturing division with limited accounting and compliance personnel was required by its corporate headquarters to document procedures for business processes and to identify financial reporting risks and controls in those processes. At the same time, management required assistance in carving out a line of business for a sale transaction.  READ FULL STUDY

Case Study #15

Special projects and reconciliation specialist for a nationwide bank.

A large public company financial institution required an audit and reconciliation specialist to lead various special projects and reconciliation efforts throughout the bank.  READ FULL STUDY

Case Study #16

Provided internal controls expertise, leadership, and resources to a full solution security services company.

A public company and nationwide provider of full solution security services and revenue approximating $140 million required expertise, leadership and resources to implement the May 2013 COSO Framework, assist the company in documenting its risk assessment, enhance business process documentation and controls, including IT and entity level controls, and to assist in developing ongoing monitoring plans and separate evaluations. READ FULL STUDY

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CLIENT CASE STUDIES

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Insight-driven internal auditing

• Call for Change
• When Tech Meets Human Ingenuity
• A Valuable Difference
• Meet the Team
• Related Capabilities

Call for change

For many businesses, the Internal Audit function is essential to assessing risk, identifying fraud and improving processes. As a global organization serving clients in more than 120 countries, Accenture faces a complex challenge in carrying out this function due to the large scope of oversight and finite resources.

To enhance audit execution, our Internal Audit function has cultivated a leading analytics practice that uses more than 200 rules-based analytics solutions. A software platform that had reached its end of life and the use of niche, non-enterprise-class software (common to many internal audit functions) prevented the full integration of analytics across the entire audit process. These factors drove the need to develop a new technology capability to enable a proactive, insight-driven way of working.

View Transcript

When tech meets human ingenuity

The Internal Audit function looked to the CIO Applied Intelligence team within the global IT organization to collaborate on developing an innovative, intelligent solution. CIO Applied Intelligence’s aim is to bring greater insights to Accenture’s services using the enterprise-class analytics platform and data lake it developed for the company.

CIO Applied Intelligence and Internal Audit already had a long-running collaboration, including gaining an understanding of the analytics platform and the benefits it could offer. The analytics skill sets within Internal Audit allowed it to closely collaborate on the technical aspects of the project.

To begin, a CIO Applied Intelligence and Internal Audit team assessed the technology landscape established years ago and the respective constraints. Internal Audit lacked the ability to process very large data sets, limiting insights. Risk models were point in time, one dimensional and inflexible, making it challenging to include analytics in the planning phases of an audit. Full population data discovery and transactional-level analysis was not possible, often resulting in random sample testing. Finally, the technology was unable to support predictive analytics, a major area of opportunity.

The solution involved transitioning existing analytical assets to the already developed CIO Applied Intelligence analytics platform. The move allowed Internal Audit to join other Accenture functions in using a suite of leading analytical tools drawing on a common data lake aligned to Accenture’s data governance structure. These tools allow Internal Audit to prepare, transform and analyze data in ways it couldn’t do before. Additionally, the analytics platform significantly reduces complexity in developing analytics.

Transformation highlights include:

Audit selection

Dynamic audit plans, reassessed throughout the year versus an annual and static exercise

Audit scoping

Customized, data-driven audit scopes versus execution of checklist-based procedures

Full population testing and risk-based coverage versus random sampling and manual tests

Collaboration between audit and the business to implement optimized solutions versus issuance of a finding with eventual follow-up

People and culture Teams from Accenture’s global IT organization and Internal Audit began collaborating with each other more than two years ago to understand the analytics platform and the benefits it could offer. The project team also included CIO Applied Intelligence leadership and business architects, along with the CIO Applied Intelligence Accenture Technology Center China solution delivery team. The project offered opportunities for the Internal Audit team to learn best practices and techniques on the CIO Applied Intelligence-developed technology, and for the delivery team to understand new business processes, risk scoring methodology and collaborate across Accenture to deliver analytic capabilities.

A valuable difference

The Internal Audit group is significantly changing the way audits are conducted. Audit plans are now dynamic rather than an annual exercise. Internal Audit can work in a data-driven way, generating new insights and managing risk across Accenture with new approaches.

Internal Audit’s existing inventory of analytics can now be consumed in a self-service manner through several interactive business intelligence models. These models feature historical risk modeling projecting risk across multiple dimensions of Accenture’s business, and can be processed within seconds compared to 48-plus-hour run times previously. The models allow self-discovery on full population data and risk analysis at the transaction level, driving more risk-based audit selections. These features all allow analytic consideration to occur in the early planning phases of an audit, driving more strategic scope.

In addition, the use of a single, shared platform allows Internal Audit to better collaborate with the business as advisory partners in sharing knowledge capital. This advantage will allow the team to significantly expand its advisory services and to drive value across both corporate Finance and the entire company, going beyond a traditional “exception-based “mentality. This upscaling in capabilities positions Internal Audit to be strong value partners of the business.

Looking ahead, the global IT organization has started pursuing robotic process automation and natural language processing further using the new platform’s capabilities. Emerging concepts, such as predictive analytics, are now being developed and integrated into the audit cycle. The application of predictive analytics on top of existing capabilities is uncommon to the audit profession, which has historically focused on rules-based analytics.

“With technology disrupting the status quo in many professions, Internal Audit must adapt to meet evolving expectations. This new, enterprise-class platform will allow full integration of analytics into all phases of the audit process, optimizing our overall value-add back to the organization.” — Joe Gonski , Senior Manager – Internal Audit, Advanced Analytics, Accenture

Meet the team

Zameer Shaikh

Kristin Kirby

Related capabilities

How accenture does it.