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, LLPKay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required byprospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends moneyto 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 andaccounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bankalleged 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 overvaluationof 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 theauditors 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 thenconfirming the stated balances.

Audit is defined as the examination of the books of accounts of the company through auditor followed…

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

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Similar questions

Explain the role of sales volume, cost, and profitability in an audit? How do sales volume, cost, and profitability evaluate the effectiveness of the sales organization?
Compare and discuss the impact of the business environment on the internal audit risk assessment
When evaluating inventory controls, an auditor would be least likely toa. Inspect documents.b. Make inquiries.c. Observe procedures.d. Consider policy and procedure manuals
Critically Analyse the importance of quality management in auditing and assuranceand recommend how audit firms can address any quality control issues and ensurecompliance with auditing and assurance standards.
STATEMENT 1: The broad categories of assertions are the basis of the auditor in developing specific audit objectives. STATEMENT 2: A specific audit objective related to the assertion of valuation is that inventory quantities include all products, materials, and supplies on hand. A. Only Statement 1 is incorrect B. Only Statement 1 is correct C. Both statements are incorrect D. Both statements are correct
A major objective of written representations is toa. Shift responsibility for financial statements from the management to auditors.b. Provide a substitute source of audit evidence for substantive procedures that auditors would otherwise perform.c. Provide management an opportunity to make assertions about the quantity and valuation of the physical inventory.d. Impress on management its ultimate responsibility for the financial statements and disclosures.
When testing a control activity’s operating effectiveness, procedures the auditor performs totest operating effectiveness would likely includea. Inquiry of appropriate personnel.b. Reading over the company’s code of conduct.c. Reperformance of the control activity.d. Both a and c are correct.