Case 4.6. Phar-Mor Inc.

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

Grant Thornton should be held liable for its reckless negligence because it ultimately prolonged Keystone bank’s ability to continue to partake in fraudulent activities. If the accounting firm would have held itself to GAAS, generally accepted as the minimum standard of professional conduct in performing an audit, Thornton would have known to exercise “heightened skepticism” during this high risk of fraud. Secondly, GAAS required written confirmations from third parties servicing assets in regards to a bank’s balance sheet. Not only did Thornton fail to obtain this written requirement, it also recklessly relied on an oral statement. GAAS also required in a high risk audit that monthly remittances of interest income on assets being serviced by

This course is the first in a two-part series that deals with auditing a company 's financial reports, internal controls, and

Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

After the Enron debacle the responsibility of auditors shifted more towards fraud detection as the scandal highlighted the lack in auditing process with regards to fraud prevention since auditors were partaking in the fabrication and falsification of accounting statement. Thus auditors legitimized the falsified financial statement whether through inaptitude to properly conduct their work or conflict of interest between management and auditors. To sum this view it is important to keep in mind that researching misrepresentation within financial statement only became recently part of the auditor’s legal obligation.

Another thing that would have prevented the Phar-Mor scandal could have come from section 206, “Conflicts of Interest”. This was a big one because three of the members of the fraud team at Phar-More were former Coopers and Lybrand auditors which could have been used as conflicts of interest and at least one of those men had been with the company for several years and because he was hired more than a year before they were audited but was able to get out of it on a technicality. He later admitted to covering it up and misstatement was illegal.

The Phar Mor case is an example of a fraud that was collusive effort of multiple individuals within the upper management who continually worked to hide evidence from the auditors. With the signs of covering losses, creating fictitious inventory, misstating financial statements, and misappropriating the company’s dwindling assets; the fraud was significant but the oversight inept procedures by the auditors extended this fraud for nearly five-years Currently, accounting firms, with the leverage provided by Statement on Auditing Standard No. 99 are shifting from the cost-pressured audit situation of the past to more quality audits and fulfilling the responsibility to plan and perform.

Phar-Mor Inc. fell prey to greed from the top. Unfortunately, the auditing firm assisted the organization with the conspiracy to defraud the users of financial reporting, the government, and the stakeholders. The chief officers used the funds for personal usage and appropriated funds to functions that were not related to the organization business. The financial statements were riddled with material misstatements and fraud acts of theft were blatant. For example, the senior financial officers including the CEO grossly over stated inventory to hide losses.

The link between forensic accounting and professional auditing begins and ends with the Fundamental Principles and the Specific Guidance Statements of Auditing for the forensic accountant. Professionals in both forensic accounting and independent external auditing must maintain integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. These are the fundamental principles. Both types of accountants must have these principles, although there may be differences between the forensic accountant and the external auditor within how each of these five areas are applied in practice. For instance, both disciplines require integrity. For the external auditor,

The Lakeside Company: Auditing Cases, 11th edition, has been updated in light of the accounting scandals of the

This paper will discuss the hot topics in emerging issues that was discussed in previous assignments. Several companies can benefit from finding ways to implement a comprehensive audit plan to reduce the likelihood of fraud occurring. Ideas associated with the SDLC and how to create phases that will fall in line with this execution are also detailed in this assignment. The SDLC assists in reducing fraud and cannot be applied lightly; this plan makes the process of fraud prevention and detection easier to succumb. Updating policies and procedures is an ongoing process that cannot go unkempt.

The nature and extent of the audit work to be performed on a particular engagement depend largely upon the effectiveness of the client’s internal control in preventing or detecting material misstatements in the financial statements. Before the auditors can evaluate the effectiveness of internal control, they need a knowledge and understanding of how it works,what control exist and who perfoms them, how various types of transactions are processed and recorded, and what accounting records and supporting documentation exist. The auditors must have a sufficient understanding of the design and implimentation of internal control to plan the audit.

In the accounting profession, whether its managerial or financial accounting, the systematic examination of the accounting records (books, documents, vouchers, etc) is defined as auditing. The Federal Securities and Exchange Commission, or the SEC, requires companies that are publicly held to have their financial statements examined by an auditor(s). In auditing, the primary purpose is to ascertain how “fair and true” the financial statements represent the issue under concern. Auditing acts in the purpose to add assurance; Assurance is the guarantee that the records and statements have been fairly

The King Report lays out the importance of internal auditors in the area of governance. Auditors need to be provided with guidance for the conduct of internal auditing and this guidance is provided by through the International Standards for the Professional Practice of Internal Auditing. The standards provide basic principles that represent the practice of internal auditing, provide a framework for performing audit activities, establish the basis for the evaluation of internal audit performance and lastly serve to improve organisational processes and operations. The standards are divided into attribute standards which describe the characteristics of the Internal Audit Activity and the Internal Auditor and performance standards which describe the Internal Audit Services. Standard 2100 refers to