1. BDO Seidman's attorneys pointed out correctly that professional standards do not prohibit auditors and client personnel from being "friend." At what point do such relationships result in violations of the auditor independence rules and guidelines? Provide hypothetical examples of strengthen your answer?
2. According to court testimony, on July 20 1995, Drew Bergman recommended to HMI's board of directors that Mei-ya Tsai be hired as the company's chief accounting officer (CAO). One week later, BDO Seidman issued its audit report on HMI's 1995 financial statements. Under presently existing professional standards would this situation have presented and independence "problem" for BDO Seidman? Defend your answer.
3. Under what circumstances is an inventory rollback or rollforward typically performed? How valid is the evidence yielded by this audit procedure? Explain.
4. Jill Karnick abandoned her attempt to competed an inventory rollforward because of the considerable amount of work the procedure involved. Do you believe she made a appropriate decision given the circumstances she faced? How should auditors weigh the cost of an audit procedure, in terms of time and other resources, against the quantity and quality of evidence that it yields?
5. Should the results of inconclusive audit tests be included in audit workpapers? Defend your answer.
6. A major focus of the trial in this case was BDO Seidman's consideration of, and response to, the "red flags" apparent during the 1995 HMI audit. Define or describe the phrase "red flags." Explain the impact of red flags identified by auditors on each major phase of an audit.
7. The PSLRA requires auditors to report the sec illegal acts "that would have a material effect" on a client's financial statements, assuming client management refuses to do so. Briefly describe there hypothetical situation involving potential illegal acts discovered by auditors. Indicate whether the auditors involved in these situations should insist that client management report the given item to the SEC. Defend your decision for each item.