Castello instructed several of his subordinates to misrepresent CBI's reported operating results and financial condition for the fiscal years ended April 30, 1992, and 1993.1 Those misrepresentations allowed Castello to receive large, year-end bonuses to which he was not entitled. CBI actively concealed the fraudulent activities from TCW's management, from TCW's appointees to CBI's board, and from the company's E&Y auditors because Castello realized that the scheme, if discovered, would qualify as a control-triggering event under the terms of the 1991 purchase agreement with TCW. Several years later, in a lawsuit prompted by Castello's fraud, TCW executives testified that they would have immediately seized control of CBI if they had become aware of that scheme.
Understating CBI's year-end accounts payable was one of the methods Castello and his confederates used to distort CBI's 1992 and 1993 financial statements. At any point in time, CBI had large outstanding payables to its suppliers, which included major pharmaceutical manufacturers such as Burroughs-Wellcome, Schering, and FoxMeyer. At the end of fiscal 1992 and fiscal 1993, CBI understated payables due to its large vendors by millions of dollars. Judge Burton Lifland, the federal magistrate who presided over the lawsuit stemming from Castello's fraudulent scheme, ruled that the intentional understatements of CBI's year-end payables were very material to the company's 1992 and 1993 financial statements.

Questions
1. Identify specific fraud risk factors present during PwC's audits of the Lipper hedge funds. Explain how PwC should have responded to the fraud risk factors that you identified.
2. Provide examples of important audit objectives for complex financial instruments and transactions. For each audit objective that you identify, list one or more audit procedures that could be used to accomplish that objective.
3. Identify the factors that may have contributed to the alleged flaws in the audit procedures that PwC applied in testing the year-end market values of the Lipper hedge funds' investments. Discuss specific measures that audit firms can employ to reduce the likelihood that such factors will undercut the quality of their audits.

4. Under what circumstances, if any, should an audit engagement partner acquiesce to a client’s request to remove a member of the audit engagement team?
5. E&Y officials believed that the CBI audits were high-risk engagements. Under what general circumstances should an audit firm choose not to accept a highrisk engagement?