The Ontario Securities Commission (OSC) found that Zungui Haixi Corporation, a manufacturer of athletic footwear, apparel, accessories, and casual footwear based in China, had fraudulently overstated its revenue. The OSC also alleged the audit firm, Ernst & Young LLP (EY), failed on the Zungui Haixi audit for its role in the accounting violations. The OSC and EY subsequently reached a settlement agreement.

REQUIRED

a. Access the Statement of Allegations against EY at https:// www.osc.gov.on.ca/en/Proceedings_soa_20111107_zungui. htm . Read the statement and briefly summarize the alleged revenue fraud.

b. Summarize the fraud risks identified by EY and the type of fraud procedures performed by EY in response to those risks.

c. Explain why the OSC alleged that EY failed to obtain sufficient and appropriate audit evidence regarding the CBI Reports for distributors and suppliers.

d. Explain why the OSC alleged that EY failed to exercise appropriate professional skepticism in its examination of accounts receivable confirmations.

e. Explain why an IPO audit is a higher risk audit and why the OSC alleged that EY did not adequately adjust its overall audit strategy for this higher risk.