Directions: Read the following case information and answer the question(s). Prepare your answer for this discussion topic which will be due for class on Monday, March 20, 2017. Your answer should be at least 1/2 page double-spaced and in your own words. Be prepared to discuss the topic with your classmates also. No one student will be expected to carry on the discussion. All students will be expected to participate in order to receive full credit.

One of the main objectives in the audit of cash is the confirmation of cash balances with financial institutions. This has long been a standard audit procedure and is accomplished routinely in audits. However, no audit procedure should be taken lightly or considered “routine” as we can see by the following case involving the Italian company, Parmalat.

Parmalat, an Italian dairy and food giant, engaged in a tangled scheme involving dozens of offshore front companies to invent assets to offset perhaps as much as $11 billion in liabilities over more than a decade. The fraud involved an off-shore company called Bonlat Financing, which was registered in the Cayman Islands. Parmalat, in information for investors, described Bonlat as a ''treasury center.'' But people close to the investigation called it a ''garbage can,'' where Parmalat parked all kinds of liabilities accrued at subsidiaries around the world. The accounting firm, Grant Thornton, helped to create Bonlat and continued as its auditor after Deloitte & Touche became the auditor of Parmalat in 1999. On its balance sheet, Parmalat declared Bonlat to be in possession of assets that included 3.95 billion euros (now $4.9 billion) supposedly held by Bank of America. In fact, the people close to the inquiry said, Bonlat's assets seemed to exist only on paper.

As part of the Bonlat audit, Grant Thornton received confirmation on Bank of America letterhead from Parmalat confirming the existence of 4.2 billion euros in an account for Bonet. Bank of America later declared the confirmation a forgery. Investigators believe that the confirmation was forged with the use of scanners by Parmalat finance officers. When asked why they used Bank of America letterhead, the Parmalat chief financial officer, Fausto Tonna, stated that it was the first to come into their head. In a statement, Grant Thornton said the Bonlat audit ''was conducted in full compliance with appropriate, current auditing standards,'' but acknowledged that it ''may have been the victim of a fraud committed by others.''

Partly because of the fraud perpetrated by Parmalat, confirmations are now being handled through websites that are controlled and maintained by a trusted third-party service provider. The website information can be treated as meeting the definition of a written confirmation and may be considered appropriate.

Based on the information in your test book on pages 404-406 concerning bank confirmations, discuss the weaknesses in the confirmation process by Grant Thornton in accepting the Bank of America confirmation. Do you believe that the use of third-party websites will increase or decrease the chance of fraud in bank confirmations and give reasons for your opinion?

Answer rating: 100% (QA)

Answers Ans I believe the Grant Thornton effort would have little more than the just believing on th... View the full answer