Phar Case Study

AU section 230, auditors should exercise “due professional care in the performance of work”, hence apply professional skepticism. The auditor should be Impartial to the level of management’s honesty and pursue factual evidence to support findings and conclusions. 2. A) The client can be In a more powerful position Han the auditor in the auditor-client relationship if the auditor is trying to sell the client additional services.

) SOX prohibits external auditors from providing certain services to clients Including: bookkeeping or other services relating to the accounting records or financial statements of the audit client; financial Information systems design and implementation; appraisal or evaluation services, fairness opinions or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer, investment advisor, or investment banking services; legal services and expert services unrelated to the audit; 3. ) If I were an Equity investor, I would pursue legal action against the auditors if there was a reckless misrepresentation and lack of due diligence In verifying accuracy of financial Information and that It Is free of material misstatements. I would sue the auditors for malpractice. B) Negligence as it is used in legal cases involving independent auditors is defined as allure to conduct an audit with “due professional care in the performance of work”. Ordinary negligence results from lack of experience, training, or oversight.

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Gross negligence is a reckless disregard of accounting, reporting, and auditing standards. C) Negligence refers to the absence of attention to duty that leads to material misstatement of information. Fraud is the intentional concealment or misstatement of Information with criminal Intent. Recklessness refers to the disregard of principals/standards In conducting the audit and failing to discover the underlying fraud. .

A) under the ultramarine Doctrine auditors are only liable for negligence to third parties who are in priority of contract or primary beneficiaries.

Auditors were held liable only under the condition that the auditors know the third party will see their work product and will rely on the work product for a particular, know purpose. The third party would have to prove that the auditor exercised fraudulent conduct, reckless misstatement, or had no genuine belief in the facts of the audit. B) ultramarine only nine auditors ladle Dates on consensual relationship anon promptly Is established. Rush Factors holds auditors liable to third parties for the contemplated use of the audit.

Such as, Par-Moor audited financial were used by shareholders and investors in their decision to purchase or sell Par-Moor’s stocks.

5. A) Under the Securities Act of 1933 auditors have the burden of proving “due diligence”; auditors can avoid liability if they can demonstrate “due diligence”. Securities Act of 1934 requires public companies to file annual audited financial statements with the SEC. Under Securities Act of 1934, the burden of proof belongs to the third party (I. . Shareholders) to prove the existence of a Sciences, the intent to deceive, manipulate, or defraud.

Audit is liable for making a misstatement or omission of a material fact, whether knowingly or recklessly, in the purchasing or selling of a security. 6. A) Bristol-Meyers Squibb Company inflated revenue by forcing wholesalers to accept more inventory than needed. Laramie Wire Manufacturing Company transferred inventory from one plant to another. B) The intentional misstatement of inventory is difficult to detect because it often involves collusion amongst upper management employing elaborate schemes including falsify documents.

Even physical count of inventory can be vulnerable to manipulation.

C) Par-Moor was successful in fooling Coopers & Library for several years with inventory overstatement because Par-Moor knew Coopers audit procedure. Par-Moor knew beforehand which four stores would be audited and they prepared the stores and made false entries. Coopers only did a sample test of Par-Moor’s inventory to save cost and accepted management explanation for the discrepancies in gross margins. Coopers only worked with Par-

Moor’s consolidated financial and the fraud accounts were cleared out. D) Prevention or detection of overstatement of inventory by auditors should employ professional skepticism and diligence in identifying any variances or patterns that may be red flags.

Auditors can prevent fraud by thoroughly reviewing the inventory counting procedures, conduct spontaneous inventory audits, verify inventory documents to physical inventory, following up and confirming any irregularities in inventory were justifiable, and scanning the general ledger for any unusual or large entries. A) Coopers considered Par-Moor to be an inherently “high risk” client because Par-Moor “engaged in hard-to-reconcile accounting practices”. Par-Moor recorded a 7 million dollar settlement from a related party, Tomcat, without sufficient supporting documents. Par-Moor did not have a perpetual inventory record system and used the retail method for valuing inventory; Coopers identified Par-Moor’s inventory pricing as high risk. B) Yes, it is the responsibility of the Auditors to detect material misstatements due to error and fraud.

Shareholders and investors make their decisions based on the assumption that the auditors have confirmed the validity of the information provided by management. C) Par-Moor created an environment conducive for fraud, the red flags included a lack of management information systems, poor internal controls, the hands-off management style of David Shapiro (CEO) and Menus was able to do as he pleased, inadequate internal audit functions, Par-Moor had knowledge of the audit procedures and objectives, and Par-Moor engaged in many related party transactions.