The senior on a CPA firm's largest audit engagement received a request from the client's CFO for
Question:
The senior on a CPA firm's largest audit engagement received a request from the client's CFO for a copy of "any communications the firm has sent relating tointernal-control-relatedmatters identified during thecurrent- andprior-yearaudits and copies of internal control documentation completed by the firm." Operating under the assumption that the client was finally going to address its many pesky control deficiencies, the senior happily sent an email with the requesteddocuments. A short time later the firm received notification of a lawsuit from the client. The complaint asserted that the audit firm had failed to detect an embezzlement scheme perpetrated by the accounts payable clerk. It further indicated that the firm's failure to detect a breakdown in internal controls allowed for the payment of fictitious vendorinvoices.
The firm's legal counsel hired an expert to review each year's engagement workpapers. One hopeful yet disturbing issue arose: The firm had informed the client of a significant deficiency in internal controls in itsprior-yearmanagement letter. Had the deficiency been corrected, the embezzlement scheme likely would have been discovered. The disturbing pointthe significant deficiency was not mentioned incurrent-yearengagement planning documentation, neither in risk assessment nor in the design of planned audit procedures. It appeared as though theprior-yeardocumentation had simply been copied to thecurrent-yearfile with updated completion dates. No additional audit procedures addressed the issue, and the scheme continued for an additional six months beyond issuance of thecurrent-yearauditreport.
Read the CASE above and discuss how the CPA firm could avoided the situation?
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley