Question

In May 2011, Deloitte Touche Tohmatsu (DTT) resigned as the auditor for Longtop Financial Technologies Limited (Longtop). Excerpts from DTT's resignation letter are provided here:
As part of the process for auditing the Company's financial statements for the year ended 31 March 2011, we determined that, in regard to bank confirmations, it was appropriate to perform follow up visits to certain banks. These audit steps were recently performed and identified a number of very serious defects, including statements by bank staff that their bank had no record of certain transactions; confirmation replies previously received were said to be false; significant differences in deposit balances reported by the bank staff compared with the amounts identified in previously received confirmations (and in the books and records of the Group); and significant bank borrowings reported by bank staff not identified in previously received confirmations (and not recorded in the books and records of the Group).
In the light of this, a formal second round of bank confirmation was initiated on 17 May. Within hours however, as a result of intervention by the Company's officials including the Chief Operating Officer, the confirmation process was stopped amid serious and troubling new developments including: calls to banks by the Company asserting that Deloitte was not their auditor; seizure by the Company's staff of second round bank confirmation documentation on bank premises; threats to stop our staff leaving the Company premises unless they allowed the Company to retain our audit files then on the premises; and then seizure by the Company of certain of our working papers.
Then on 20 May the Chairman of the Company, Mr. Jia Xiao Gong called our Eastern Region Managing Partner, Mr. Paul Sin, and informed him in the course of their conversation that "there were fake revenue in the past so there were fake cash recorded on the books". Mr. Jia did not answer when questioned as to the extent and duration of the discrepancies. When asked who was involved, Mr. Jia answered: "senior management".
a. What audit evidence-related problems did DTT encounter during the audit of Longtop?
b. Review Exhibit 6.8. This chapter describes external confirmations as generally being a reliable, high quality type of evidence. When would that generality not be accurate? What assumptions should the auditor address concerning confirmations before concluding that using confirmations will result in reliable audit evidence?
c. Explain the role of professional skepticism in the context of evaluating evidence obtained from confirmations.



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  • CreatedSeptember 22, 2014
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