According to Sikka et al., (2009, pp.139) “In capitalist societies, all economic surpluses need to be accounted, allocated and distributed to the absent capitalists”. The traditional auditing process has been to verify all items on the profit and loss and the balance sheet, all of which are outcomes resulting from past transaction under the historical cost model.Several layers of complexity have been added to auditing large financial institutions and companies. New technologies, new financial instruments (derivatives, credit default swaps.), a more integrated global economy have been putting strains on the auditing profession. Banks, hedge funds and insurance companies have been key actors in the financialization of the economy (Bank of England, 2008).An article by Reuters, (2008) quoted in Sikka (2009) observed that accounting has become a new exercise in creative fiction, with the result that banks are carrying a lot of “sludge” assets clogging up the balance sheet”. Auditing procedures involve a consideration of the entity’s ability to continue in operational existence for the current, and possible future circumstances of the business and the environment in which its operates. Required:-(1) Review at least two company collapses e.g. Lehman Bros., Worldcom., Xerox, Enron with a view to understanding how the companies were given unqualified audit reports, and within a short time were in financial crisis and ultimately ending in collapse. (2) Review any guidance and regulations on auditing complex financial instruments in Australia and Internationally. (3) The knowledge base of auditors has traditionally utilized methods of valuing tangible things which could be counted and measured. This paradigm is being eclipsed by complex financial transactions. Given the conventional auditing technologies, should consideration be given to alternative forms of accounting, disclosures and accountabilities.
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