Running head: CONTEMPORARY AUDITING CBI HOLDING COMPANY, INC. CASE Prepared by: University: 1 CONTEMPORARY AUDITING 2 #1 The primary objective of why auditors investigate the material accuracy of account payables is to determine their completeness. Comprehensive financial control measures on a company’s account payables are important to monitor any material additions on the accounts. Unfortunately, most companies have weak internal control measures for these accounts making it difficult for auditors to ascertain the completeness of the account payables. The lack of an economic incentive for payables has been a contributing factor in the violation of the completeness of a company’s liabilities and expense accounts. In my opinion, a proper application of the two primary audit tests by E&Y would have been them verify the completeness of CBI’s payables accounts. There was no proper reconciliation of the vendors’ statement with the liabilities recorded and the account payables with the general ledger. The search for unrecorded liabilities is generally applied on account payables to determine if there are any year-end liabilities and proper application of the tests would have therefore helped uncover any existing issues pertinent to account payables. They would have discovered the huge discrepancies between the vendors’ vouchers and CBI’s recorded liabilities hence detected the fraud. #2 Confirmations help authenticate any unrecorded liabilities and therefore E&Y ought to have used it when auditing CBI’s account payables. They are a more reliable source of evidence on unrecorded liabilities as opposed to relying on the statement on vendors which are is usually controlled by the client hence have a high chance of being manipulated. Another reason is that considering account payables are high-risk audit areas, CBI’s internal controls were considered CONTEMPORARY AUDITING 3 relatively weak. Therefore, E&Y should have obtained confirmations from some of CBI’s largest vendors and compared the response to the companies recorded liabilities. Also, auditors have a greater assurance from their substantive tests when the inherent risk levels are high. The major difference between account receivables and payables confirmations lies on their application. One difference is that account receivables confirmations generally seek to ascertain the existence of sales while account payables confirmation seeks to ascertain the completeness of liabilities. Another difference is that account payables confirmations are less common with auditors because there is significant evidence to prove account payables such as vendors' invoices and monthly vendors' statements. Conversely, confirmation for account receivables is very important for auditors unless they can prove the presence of sales during the financial year. Account payables confirmation is done towards the year-end because concerns are on unrecorded liabilities, but as for account receivables, the confirmations are done both at yearend and at an interim date. Confirmations for both accounts are done using the blank or zero balance confirmation forms where the auditor fails to state the balance owed but instead requests the vendor to state the amount themselves or provide any relevant information. #3 It was necessary for E&Y to inform CBI’s management that they would be conducting a re-audit by issuing a statement that nullifies the existing audit report. This is because some information in the original audit report might have been inaccurate hence the management could not rely on that information. It would also help the management improve their internal control measures to avoid a repetition of the same mistakes in the future. E&Y ought to have also informed the management of CBI on mistakes made in their initial auditing and relevant CONTEMPORARY AUDITING 4 disclosure that would change their original audit report since the new developments have a possibility of being repeated. #4 There are several circumstances where an audit team could agree with the client’s request to remove a member from their audit team. On such circumstance is when there is a disagreement between the member and the client on professional matters. Disagreement with an audit team member on matters or transactions relating to an audit may necessitate a client to request the removal of that member for fear of an unfair outcome especially if the member is a senior member of the audit team. Also when a member of the audit team performs services for a client or has joint business enterprises with a competitor of the client, the client can argue that the member has self-interests which might jeopardize a fair outcome of the audit process. #5 There are specific thresholds of risk that an auditor is willing to accept. One circumstance is when the audit risk is too high due to the relatively weak internal controls in the client’s business, engagement in complex transactions and numerous year-end transactions. When the client also has a reputation of dishonesty in their records and engages in fraudulence dealings which pose a risk of fraud. Another circumstance is when the client has a high possibility of going out of business which may lead to suing by the creditors arguing that the auditor should have anticipated the problem while carrying the audit. The third circumstance is when the client is embroiled in many litigations or a client who has changed their auditors multiple times which might expose the auditor to the litigations.
