Ligard Pharmaceuticals Case Summary

Case # 9: 7.1 Ligard Pharmaceuticals
Certainly, an auditor would be guided by the following auditing standards:
1. AS 8.03 Audit Risk
In order to express an appropriate opinion for the financial statements, the auditor must plan and perform the audit free of material misstatement. In this case, Fazio and his subordinates evaluate the risk of Ligand and posed it as a “greater than normal” degree of engagement risk, because Ligand had problem on its sales returns.
2. AU 210.01-03 Training and Proficiency of the Independent Auditor
The auditor should perform with adequate technical training and proficiency. However, in this case, Fazio did not have competent to perform public company audits. He failed to audit Ligand appropriately.
3. AS 15.04-05
AU 316.01-04 Consideration of Fraud in a Financial Statement Audit
The auditor has responses to design and implement appropriate responses to the risks of material misstatement. The product returns of Ligand was materially understated. However, Fazio knew this issue and did not suggest that the company recall and modify its 2003 financial statements.
5. AU 561.05-0.6 Subsequent Discovery of Facts Existing at the Date of the Auditor's Report
When the subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report, the auditor should take action in accordance with the procedures to modify the report. In May 2005, the Ligand’s audit committee and its audit firm, BDO Seidman, modify some material errors in financial statements for 2002, 2003, and the first three quarters of 2004. The errors resulted principally from “improperly recognizing revenue on product shipments to distributors.” The financial restatement released by Ligand later in 2005 reduced the company’s previously reported revenues for 2003 by 52 percent or $59 million in total. The company also increased its reported operating loss for 2003 by 250 percent.
6. AU 329.02-0.4 Audit
However, in this case, Fazio failed to perform appropriate and adequate audit procedures. He did not report that Ligand substantially underestimated its sale returns.
7. AS 10.01-02 Supervision of the Audit Engagement
Fazio failed to adequately supervise others, ensure the others perform audit appropriately on the Ligand’s product returns.
8. AU 230.07 Professional Skepticism
Even though Deloitte auditors found that Ligand had significantly underestimated its future sales returns, Deloitte failed to exercise due professional care in the audit, and failed to obtain sufficient evidence to support the auditing opinion.
9. AS 12.49 Conducting a Discussion among Engagement Team Members Regarding Risks of Material Misstatement
Key team members should discuss the company's accounting standards. In this case, the auditing standard change because the Ligand’s fraud. These reforms covered such as the public companies should have their own internal control.
10. AS 6.09 Correction of a Material Misstatement in Previously Issued Financial Statements
The auditors should report addition explanation when they correct a material misstatement in the previously financial statements. In this case, Ligand restated its financial statements of previous years, and it should report its