Arthur Anderson's Response To Karen Paetz Case Study
Case 6.6
Arthur Anderson’s response to Karen Paetz was definitely not sufficient and lack of professional due care.
According to AS No.10, the engagement team is responsible to bring attention to any disagreements or concerns of relative persons that might have significance to financial statements. In this case, the senior manager revealed about $70 million negative net worth of ALO, and the ALO was losing $2.5 million monthly. This potential risk of lacking sufficient capital to continue operation that pervasively related to management assertions and going concern. To this extend, the engagement team members should have bring enough attention respecting the audit issues, however, Arthur Anderson’s engagement partner and manager reported the …show more content…
concern of Paetz as a “nonevent”.
The auditors should have insisted asking BFA make detailed financial statements of both ALO and New Church Ventures, which were two of most significant affiliates of BFA.
The auditor should also evaluate the financial capability of those two related parties, and their financial situations and uncollected balance that might affect the ability to repay the loans to BFA. After determine that the BFA was intentionally hiding the relationship and financial situations of those two related parties, the auditors should require the management disclose in the financial statement and reassess the risk of material misstatement.
During the audit of transaction, Arthur Anderson vouched the transaction to match the book records of Foundation Investments of the document of bank statement, in order to verify whether the transaction was under proper authority and was in right amount.
However, just testified the voucher was far from enough, because even though the transaction was in fact recorded accurately, but the down payment or recourse of the money was problematic. The down cash payment should not indirectly from the buyer or seller according to GAAP, thus auditor should have inspected whether the revenue recognition was appropriate and in accordance the
GAAP.
What’s more, auditors of Arthur Anderson can also make inquiries of relative persons, such as Foundation Companies’ CFO Ron Estes, obtaining information why there is absence of his sign in the final management letter.
In addition, in assessing the value of the property, the auditor also needs to supplement the evidence in evaluating the reasonableness of the estimation of the value of the transaction. In this case, same transactions happened in the same day, but the property double the value when sold to the Foundation Investment. Auditor should have noticed there might be a fraud risk involving it.
Arthur Anderson’s response to Karen Paetz was definitely not sufficient and lack of professional due care.
According to AS No.10, the engagement team is responsible to bring attention to any disagreements or concerns of relative persons that might have significance to financial statements. In this case, the senior manager revealed about $70 million negative net worth of ALO, and the ALO was losing $2.5 million monthly. This potential risk of lacking sufficient capital to continue operation that pervasively related to management assertions and going concern. To this extend, the engagement team members should have bring enough attention respecting the audit issues, however, Arthur Anderson’s engagement partner and manager reported the …show more content…
concern of Paetz as a “nonevent”.
The auditors should have insisted asking BFA make detailed financial statements of both ALO and New Church Ventures, which were two of most significant affiliates of BFA.
The auditor should also evaluate the financial capability of those two related parties, and their financial situations and uncollected balance that might affect the ability to repay the loans to BFA. After determine that the BFA was intentionally hiding the relationship and financial situations of those two related parties, the auditors should require the management disclose in the financial statement and reassess the risk of material misstatement.
During the audit of transaction, Arthur Anderson vouched the transaction to match the book records of Foundation Investments of the document of bank statement, in order to verify whether the transaction was under proper authority and was in right amount.
However, just testified the voucher was far from enough, because even though the transaction was in fact recorded accurately, but the down payment or recourse of the money was problematic. The down cash payment should not indirectly from the buyer or seller according to GAAP, thus auditor should have inspected whether the revenue recognition was appropriate and in accordance the
GAAP.
What’s more, auditors of Arthur Anderson can also make inquiries of relative persons, such as Foundation Companies’ CFO Ron Estes, obtaining information why there is absence of his sign in the final management letter.
In addition, in assessing the value of the property, the auditor also needs to supplement the evidence in evaluating the reasonableness of the estimation of the value of the transaction. In this case, same transactions happened in the same day, but the property double the value when sold to the Foundation Investment. Auditor should have noticed there might be a fraud risk involving it.