Case 2.6: CBI Holding Company, Inc

Question 1

Completeness is the primary audit objective involved with accounts payable. Clients usually have a high probability of violating the completeness assertion for expense and liability accounts compared to other management assertions. Completeness is an indication that there is no existence of material additions for the accounts payable.

If the two primary audit procedures had been applied properly by E&Y, they would have yielded sufficient evidence to showcase the completeness assertion. The procedures would have helped in uncovering the issues that were prevalent to the account. The search for unrecorded liabilities is usually applied in numerous instances to accounts payable. The search procedure provides reliable evidence that shows the completeness assertion since clients have to make payments for year-end liabilities during the first weeks of a financial year.

Question 2

Yes, E&Y auditors should have used confirmations in auditing CBI’s accounts payable. This is because confirmation is usually used as a step to search for unrecorded liabilities. It can be relied upon to gather evidence from third parties as it is more reliable compared to obtaining evidence from inside the entity. The higher the levels of inherent risk, the greater the assurance auditors receive from substantive tests.

The difference between accounts payable and accounts receivable confirmations is that accounts payable are a confirmation of completeness of liabilities while accounts receivable confirm the existence of sales.

Question 3

E&Y had an obligation to inform the CBI management. An auditor is expected to inform a client in case they came across facts that would change the opinion of the audit report after the report has already been issued. It is the obligation of the auditor to inform and advice the client the existing audit reports should be issued to include the new opinion. Any relevant disclosures that need to be revised should be clearly stated. It is also upon the auditor to issue a statement nullifying the previous audit report and advising the client that the report should not be relied upon. In case the client refuses to adhere to the information issued, the auditor has an obligation to inform the board members so that they can ensure that the report is not relied upon.

Question 4

For a client to request the removal of an auditor from an engagement, he/she should write to the partner and outline the reasons for requesting the removal. Among the circumstances that an auditor would be removed upon the request of the client is in case the auditor was conducting varied forms of misconduct during the engagement. Another aspect would be if the auditor was negotiating for an employment opportunity with the client. In case an auditor’s independence is compromised by maybe being related to related to a top-level official in the organization, the audit partner might heed the client’s request.

Question 5

Every audit firm has a specific threshold of risk that they are willing to take. By undertaking a risk, an auditor faces the probability of damage or loss due to litigation or adverse publicity. The exposure is likely to present itself even when the regulations have been adhered to appropriately. A firm will have a certain level of risk that they are willing to accept based on its resources, size and fees involved. An audit firm can choose not to accept a high-risk engagement if the risk involved is above the firm’s risk threshold.

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