Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to rely on the audited statements. After the audit report is issued, the bank that ultimately made the loan discovers that the client's inventory and accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank alleged that the auditor foiled to communicate about the inode Tegordk9oning ond in
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to rely on the audited statements. After the audit report is issued, the bank that ultimately made the loan discovers that the client's inventory and accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank alleged that the auditor foiled to communicate about the inode Tegordk9oning ond in
Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter4: Professional Legal Liability
Section: Chapter Questions
Problem 18RQSC
Related questions
Question
3. Critically evaluate the auditors' statements about the inventory and receivables with respect to generally accepted auditing standards and the firm's ethical responsibilities.
![Case 6-6 Kay & Lee, LLP
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by
prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money
to the client is likely to rely on the audited statements.
After the audit report is issued, the bank that ultimately made the loan discovers that the client's inventory and
accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank
alleged that the auditor failed to communicate about the inadequacy of the client's internal recordkeeping and inven-
tory control. Moreover, the bank claims that the auditors were grossly negligent in not discovering the overvaluation
of inventory and accounts receivable.
The auditors asserted that there was no way for them to know that the client included in the inventory account
$1 million of merchandise in transit to a customer on December 31, 2015. The shipping terms were unclear so the
auditors accepted management's representations in that regard (FOB Destination). As for the receivables, the audi-
tors claimed the client falsified confirmations by sending them to a post office address, retrieving them, and then
confirming the stated balances.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0823bb95-03ec-4494-b351-d521215cdead%2F14c54049-c096-4717-bc76-687d73ee453a%2F01frn7r_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Case 6-6 Kay & Lee, LLP
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by
prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money
to the client is likely to rely on the audited statements.
After the audit report is issued, the bank that ultimately made the loan discovers that the client's inventory and
accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank
alleged that the auditor failed to communicate about the inadequacy of the client's internal recordkeeping and inven-
tory control. Moreover, the bank claims that the auditors were grossly negligent in not discovering the overvaluation
of inventory and accounts receivable.
The auditors asserted that there was no way for them to know that the client included in the inventory account
$1 million of merchandise in transit to a customer on December 31, 2015. The shipping terms were unclear so the
auditors accepted management's representations in that regard (FOB Destination). As for the receivables, the audi-
tors claimed the client falsified confirmations by sending them to a post office address, retrieving them, and then
confirming the stated balances.
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