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Case Study 2.

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1. The primary audit objectives that auditors hope to accomplish by confirming a
clients year-end accounts receivable was to obtain enough capable evidences. It
was made to obtain evidences from the third parties to help for assessing the
transactions and accounts that should be included in the financial statements.
Also, it aided to check the management assertions such as existence, rights and
obligations. However, sometimes the confirmations cannot address all assertions
equally well. So, the auditors sometimes should consider other audit procedures to
complete the confirmation. (AU330.12)
The objective of year-end sales cutoff tests was given information of sales to the
auditors. It helped the auditors to check the sales were being recorded in the
proper financial period or not. During the tests, the auditors should look
cautiously at the year-end transactions to check the completeness and existence
assertions of accounts receivable. Sometimes, performing sales cutoff tests can
help to confirm the accounts receivables. (AU330.09)
2. Cooper & Lybrand indeed make some mistakes or errors. First, the auditors
ignored the suspicious nature from the Wow Wee and West Coast Liquidators
which was a large amount of account receivables. Moreover, Cooper & Lybrand
ignored the happiness Express had factored most of its accounts receivables,
such as allowed a finance company to approve the credit sales before shipments
were made to the customers. As the textbook mentions, Unusually large
increases in year-end sales to a single or a few customers is an indicator of the
risk of potential material misstatements in financial statements.

At the same time, the auditors only relied on provided information from the
former CFO which was given a chance for him to forge. For example, he provided
a wrong address for Wow Wees receivable.
So, people can see that there is recklessness when the auditors failed to follow up
with the investigation. However, there is also an opportunity to have the
occurrence of fraud. It is because sometimes the auditor might be tried to allow
the approval of misstatements.
3. The Coopers & Lybrand auditors should have confirmed the receivable from West
Coast Liquidators. It is an importance audit procedures for the auditors to do. In
this case, there are several red flags occurred in the company which had put it to
a risky position. Because of the year-end sale is high, the auditors should consider
to confirm that sale. (AU330.08) So, besides the accounts receivable, thats why
the auditors also need to consider the year-end cutoff. Generally, in order to keep
the low level of audit risk of the completeness and existence assertions, it is
necessary to include these several big sales for fiscal 1995.
4. If the receivable cannot be obtained, the documents from third-party can be an
alternative way to help for the audit procedures. Some evidences like cash
receipts, shipping documents, or other client document can provide for the
existence assertion. (AU330.32) Sometimes, the auditors can rely on both internal
and external resources to look for the useful evidence, such as checking the mail
system, the money transfer system, the bank deposit, etc.
5. Yes, the auditors have the responsibility to consider or investigate the possibility.
Insider trading is clearly considered as an illegal act. In AU317, it states that the
auditors have the direct and material effect on the determination of financial
statement amounts. The indirect effect from the financial statement leads to the

disclose of the issue as a contingent liability because of the allegation or


determination of illegality. (AU317.05&06) So, this is a duty of the auditors to
determine some kinds of actions will bring any consequences to the financial
statements. Sometimes, it is necessary for the auditors to communicate with
governance.