Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the f
ID: 1172079 • Letter: K
Question
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 inventory 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 auditors claimed the client falsified confirmations by sending them to a post office address, retrieving them, and then confirming the stated balances.
3. Critically evaluate the auditors’ statements about the inventory and receivables with respect to generally accepted auditing standards and the firm’s ethical responsibilities.
Explanation / Answer
1.The present fact is touching on the responsibilities that auditor should take care while giving their opinion on each & every financial iteam included in income statement & balance sheet.
2.In this case Kay & Lee LLP was appointed to evaluate the financial statements of client so as to rely by bank on client while considering to give loan.
3. As far as inventory and accounts receivable are concern it's audiotr's reponsibility to verify it's genuiness & satisfy themselves that in case of inventory valuation are based on appropriate accounting standards & in case of accounts receivable it must be subject to third party confirmation & recognised based on best appropriate accounitng principles.
4. In case auditor is not in position to verify the geniuness of the same they must obtain management’s representations.
5. So, in this case as Kay & Lee LLP is not in position to appropriately comment in absence of sufficient appropriate audit evidence the only recorce for them is to bring the matter to the attention of bank so that bank can consider this while giving loan.
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