Question

On October 4, 2008, the PCAOB issued its annual inspection report of Grant Thornton LLP (PCAOB Release No. 104-2008-046). In conducting its inspections, the PCAOB focuses on audit engagements that it considers particularly risky or prone to error on the part of each audit firm. In its inspection report of Grant Thornton, the PCAOB noted the following problems in testing the inventory valuation assertion for a Grant Thornton client. The firm failed in the following respects to adequately test the valuation assertion regarding inventory:
● There was no evidence in the audit documentation, and no persuasive other evidence, that the firm had performed sufficient substantive procedures to test the raw materials and/or labor and overhead components of inventory at certain of its manufacturing locations. Analytical procedures, consisting of various high-level comparisons, including average cost, inventory balances, gross profit margins, and inventory turnover, were the firm's primary tests, but these procedures failed to meet the requirements for substantive analytical procedures.
● The firm failed to evaluate the assumptions that management had used to determine the reserve for obsolete inventory.
a. The PCAOB report summarized a problem with Grant Thornton's testing of a client's inventory valuation assertion.
Discuss why you believe the PCAOB was dissatisfied with the firm's performance.
b. Use the framework for professional decision making from Chapter 4 to determine the appropriate steps that the firm could have taken that would have ultimately been acceptable to the PCAOB. Recall that the framework is asfollows:


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  • CreatedSeptember 22, 2014
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