Case 7.1: Ligand Pharmaceuticals
Engagement risk is the risk that an audit firm faces when it associates itself with a particular client. It can threaten the firm’s reputation and effectiveness.
When assessing the engagement risk, Deloitte and other audit firms should consider:
Detection risk: This is the risk that an auditor might not be able to identify misstatements that are present.
Inherent risk: These are the risk factors that are prevalent in a client’s industry of operation, business model, and prevailing economic conditions.
Control risk: This is the risk associated with the ability or inability of internal controls to detect misstatements.
The professional responsibilities of an auditor are not affected when they are involved in the high-risk engagement. They remain the same as those of a normal engagement. The difference is that in such an engagement the auditor is likely to come across varied issues while executing their duties.
Monitoring: This ensures that every personnel is doing what is expected of them at all times.
Professional Development: The audit partners should have the relevant training and experience to help supervise engagements. The experience and knowledge that they possess are normally used to develop junior employees through the interactions while undertaking an engagement.
Personnel Development: This should be done through appraisals to help detect the skills that need to be improved.
The accounting standards and concepts that dictate proper accounting treatment for sales returns include recognition, presentation matters and ability to make a reasonable estimate. Ligand violated the standard that defines the factors that are likely to impair the ability to make a reasonable estimate since they did not recognize the revenues that were related to the sale of the products. The lack of historical transactions impaired the ability to make the appropriate estimate. There should have been a higher estimation, rather than relying on own expectations.
The Deloitte auditors had the responsibility of asking for the correction of the preceding year’s financial statements. As auditors, they have the responsibility of ensuring that they act in the best interest of the public. If they did not recommend for the changes to be instituted, the auditors would be letting the public to rely on those financial statements, yet they know the information contained does not reflect a true and fair view. Deloitte auditors also ought to recommend for the restatement as this ensures they are exercising professional due care. Lack of this could easily result in a penalty or lawsuit.
The principle complaints that have been directed towards PCAOB include its slowness to act in investigations of enforcement cases, it has not been able to make its regulatory power sufficient, and it concentrates on enforcement on smaller firms thus protecting the Big 4 firms.
The criticism might be justified to some extent since PCAOB is slow and the amount of regulation that it has produced is not sufficient. However, it is worth to note that it is not an easy task to ensure that every transaction is accounted for in multi-billion dollar corporations. As a young entity, PCAOB has worked to ensure that firms have attained a certain threshold of reliability.
To improve efficiency and effectiveness, PCAOB could try to expand in size while investing more resources to help handle the areas that have been problematic in the past.
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