Buds Big Blue Manufacturing Case

1. ) After performing any alternative procedures, the auditor should evaluate the combined evidence provided by the confirmations and the alternative procedures to determine whether sufficient evidence has been obtained about all the applicable financial statement assertions. In performing that evaluation, the auditor should consider (a) the reliability of the confirmations and alternative procedures; (b) the nature of any exceptions, including the implications, both quantitative and qualitative, of those exceptions; (c) the evidence provided by other procedures; and (d) whether additional evidence is needed. If the combined evidence provided by the confirmations, alternative procedures, and other procedures is not sufficient, the auditor should request additional confirmations or extend other tests, such as tests of details or analytical procedures. (AU 330) Paragraph . 09 of section 326, Audit Evidence, states that the auditor should consider the reliability of the information to be used as audit evidence. Confirmations obtained electronically can be considered to be reliable audit evidence if the auditor is satisfied that (a) the electronic confirmation process is secure and properly controlled, (b) the information obtained is a direct communication in response to a request, and (c) the information is obtained from a third party who is the intended respondent. 2. ) During the performance of confirmation procedures, the auditor should maintain control over the confirmation requests and responses. Maintaining control means establishing direct communication between the intended recipient and the auditor to minimize the possibility that the results will be biased because the interception and alteration of the confirmation requests or responses. The possibility that results will be biased based on interception and alteration of the confirmation requests and responses, is a prospect of what can go wrong if the auditor does not maintain control over the confirmation process. 3. ) Confirmation #Date SentDate ReceivedDifference Noted By Customer? Is the noted difference a misstatement Has sufficient evidence been obtained that confirms the client’s recorded balance? If no, describe additional procedures you believe should be performed. 711/12/091/22/09YesNoYes 721/12/092/5/09NoNoYes 731/12/091/26/09NoNoYes 741/12/092/9/09N/AN/AFollow up why they didn’t follow procedure and mail directly back to auditing firm. 751/12/092/6/09NoNoYes 761/12/091/30/09NoNoNo. Investigate BBB stamp on paper. Date received day after that noted on stamp 771/12/091/19/09YesYesCheck cash receipts. 4. ) Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions. Negative confirmation is a written request by the external auditor sent to a party having a financial relationship with the client and asking for a reply only in the case of disagreement. The negative form requests the recipient to respond only if he or she disagrees with the information stated on the request. Negative confirmation requests may be used to reduce audit risk to an acceptable level when (a) the combined assessed level of inherent and control risk is low, (b) a large number of small balances is involved, and (c) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. The auditor should consider performing other substantive procedures to supplement the use of negative confirmations. Negative confirmation requests may generate responses indicating misstatements, and are more likely to do so if the auditor sends a large number of negative confirmation requests and such misstatements are widespread. The auditor should investigate relevant information provided on negative confirmations that have been returned to the auditor to determine the effect such information may have on the audit. If the auditor's investigation of responses to negative confirmation requests indicates a pattern of misstatements, the auditor should reconsider his or her combined assessed level of inherent and control risk and consider the effect on planned audit procedures. Although returned negative confirmations may provide evidence about the financial statement assertions, unreturned negative confirmation requests rarely provide significant evidence concerning financial statement assertions other than certain aspects of the existence assertion. Positive confirmation is a written or oral request by the auditor of a party having financial dealings with the client about the accuracy of an item. A response is required whether the particular item is correct or incorrect. A positive confirmation can be sent to customers to verify account balances. Some positive forms request the respondent to indicate whether he or she agrees with the information stated on the request. Other positive forms, referred to as blank forms, do not state the amount (or other information) on the confirmation request, but request the recipient to fill in the balance or furnish other information. Positive forms provide audit evidence only when responses are received from the recipients; non responses do not provide audit evidence about the financial statement assertions being addressed. Since there is a risk that recipients of a positive form of confirmation request with the information to be confirmed contained on it may sign and return the confirmation without verifying that the information is correct, blank forms may be used as one way to mitigate this risk. Thus, the use of blank confirmation requests may provide a greater degree of assurance about the information confirmed. However, blank forms might result in lower response rates because additional effort may be required of the recipients; consequently, the auditor may have to perform more alternative procedures. 5. ) A real-life situation where an auditor apparently did not maintain sufficient control over the confirmation process, was an incident in 1994, where Sky Scientific, Inc. ramatically overstated assets and understated expenses in its financial statements. An SEC investigation into those financial statements led to charges being filed against both the company and its auditors. This case takes a detailed look into the independent audit of Sky’s financial statements for the purpose of understanding how the auditors failed to see the extent to which Sky’s financial reporting was misleading and to adequately challenge the assertions presented in the financial statements before Sky filed them with the SEC. This case provides an opportunity to examine numerous issues related to the audit engagement process, including audit planning, the evaluation of management representations, audit evidence and the confirmation process. The roles and responsibilities of the concurring auditor and an outside specialist are also discussed. SEC Charges In late July 1994 a senior geologist on the Commission’s staff visited some of Sky’s California and Nevada mining operations. At three of those properties she found no evidence of current or recent mining activity, no equipment, and no personnel. At another mine she found equipment and personnel but no tailings that might indicate that recent operations had existed. As a result of these observations and the recent filing of Sky’s audited financial statements, the SEC opened its investigation of Sky on August 26, 1994. In 1999 the SEC charged several members of Sky management with fraudulent accounting practices and for filing false and misleading financial statements with the Commission. They also charged American Capital Network and Robert Schlien with violations of several federal securities laws. Barry Scutillo and Mark Jensen were charged with engaging in improper professional conduct in that they intentionally, knowingly and recklessly violated the applicable professional standards when auditing a public company. Specifically, Scutillo and Jensen were charged with recklessly failing to see that most of Sky’s assets were fictitious or massively overvalued and that millions of dollars in expenses had not been recorded on Sky’s books.

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