PwC's 2000 Audit of Take-Two Despite the fact that Take-Two actively concealed its fraudulent schemes from PwC, the SEC alleged that PwC failed to comply with generally accepted auditing standards (GAAS) while auditing the company's financial statements. The SEC's allegations cen-tered on the role that Robert Fish had played in supervising PwC's 2000 audit of Take-Two. In preparing for the 2000 engagement, Fish identified "revenue recognition" and "accounts receivable reserves" as "areas of higher risk" that would be given "special attention" during that audit.ls Following its investigation of the 2000 audit, the SEC concluded that, "Fish did not properly respond to those risks as he failed to exercise due professional care and professional skepticism, and failed to obtain sufficient com-petent evidential matter."I6 The SEC ruled that as a result of Fish's poor decisions, PwC improperly issued an unqualified opinion on Take-Two's 2000 financial statements. A major focus of the 2000 audit was the $104 million of "domestic' accounts receiv-able that represented the majority of Take-Two's total receivables at the end of fiscal 2000.17 The principal audit test applied to the domestic receivables was the mailing of positive confirmation requests to 15 of Take-Two's customers that accounted for approximately 70 percent of those receivables. The PwC auditors received only one confirmation from that sample of customers, a confirmation that represented less than 2 percent of the company's domestic receivables.18 Capitol Distributing was among the 14 customers that failed to respond to PwC's confirmation requests. Because of the poor response rate to the confirmation requests, Fish decided that PwC would apply alternative audit procedures to Take-Two's domestic receivables. The principal alternative audit procedure employed by Fish and his subordinates was reviewing payments that Take-Two received in the new fiscal year from the 14 customers who had failed to return a confirmation. The PwC auditors identified $18 million of cash payments received by Take-Two from those 14 customers over the first 6 weeks of the new fiscal year. During its inves-tigation, the SEC determined that the auditors had failed to track many of those pay-ments to specific invoiced sales transactions because Take-Two's accounting records often reflected only "aggregate" cash collections for individual customers. As a result, Fish knew, or should have known, that he could not be certain whether the cash he examined from November 1 through December 8, 2000, related to the accounts receivable balances that existed as of October 31, 2000, or to sales recoraea after that date.... The fact that Take-Two's records often showed only aggregate cash collected was a red flag to Fish that any subsequent cash receipts testing relying on this data would prove ineffective?

he scheme and required him t feit more han $5 million in stock market' gains that he ealized as a result of it. In a related criminal ase, Brant pleaded guilty to a felony charge led by a New York state prosecutor and paid $1 million fine. In April 2009, Take-Two reached an agree-tent with the SEC to settle the charges filed gainst it for the backdating of options by pay-is a $3 million fine. Prior to reaching that ittlement, the company had restated its finan-al statements for the third time in five years to correct the misrepresentations linked to the improper stock option grants. Take-Two weathered the fraudulent finan-cial reporting and options backdating scan-dals and retained its prominent position in the video gaming industry. In 2008, Electronic Arts, the largest video gaming company in the U.S.. launched a $2 billion hostile takeover bid for Take-Two. Electronic Arts dropped that take-over bid in late 2008 after it met with fierce resistance from the management team that had replaced Ryan Brant and his former colleagues.

1. Identify the primary audit objectives that auditors hope to accomplish by confirming a client's year-end accounts receivable. Explain the difference between "positive" and ''negative" confirmation requests and discuss the quality of audit evidence yielded by each.

2. Identify audit tests that may be used as alternative audit procedures when a response is not received for a positive confirmation request. Compare and contrast the quality of audit evidence yielded by these procedures with that produced by audit confirmation procedures.

Answer rating: 100% (QA)

1 One of the primary objective auditors hope to fulfill by confirming the clients yearend accounts r... View the full answer