Ptl Audit Case
1. The ethical questions raised relate to the partner’s independence. He cannot be fully independent according to their professional code of conduct if he is maintaining a secret payroll for the client. He is essentially perpetrating a fraud on behalf of the client. It does not matter that PTL was not an organization registered with the SEC; the partner still has to follow the professional code of conduct that is integral to his profession and the public’s trust in it.
2. There are numerous procedures that an audit firm must perform before accepting an audit client:
a. Firstly, review the reason why the company is looking for a new auditor or why it needs to start being audited.
b. Review business structure of the client (look for red flags)
c. Review client’s past history, including its legal history, tax problems, litigations, regulatory actions, etc. Ensure that the firm only accepts client with high ethical standards to avoid damaging the firm’s reputation.
d. Obtain management integrity on the audit
e. Assess the business risks with respect to the client environment and industry
f. Ensure complete independence of the firm vis-à-vis the client (no conflict of interest)
g. Communicate with previous auditor
3. The deep pockets theory can be essentially defined as lawsuits that are brought against auditors not due to an audit failure, but due to the client’s own failure. The client will sue the audit firm simply because they are the (only) ones who have the resources against which recovery can be made. Essentially, they are suing those who can pay up.
Large class-action lawsuits can be mitigated by ensuring that everything in the audit engagement is properly documented; as well, through the representation letter, clear statement of auditor’s responsibilities will serve as proof against unfounded allegations. As well, the audit firm should avoid any other contact or additional duties with the client beyond the actual audit work which can be
2. There are numerous procedures that an audit firm must perform before accepting an audit client:
a. Firstly, review the reason why the company is looking for a new auditor or why it needs to start being audited.
b. Review business structure of the client (look for red flags)
c. Review client’s past history, including its legal history, tax problems, litigations, regulatory actions, etc. Ensure that the firm only accepts client with high ethical standards to avoid damaging the firm’s reputation.
d. Obtain management integrity on the audit
e. Assess the business risks with respect to the client environment and industry
f. Ensure complete independence of the firm vis-à-vis the client (no conflict of interest)
g. Communicate with previous auditor
3. The deep pockets theory can be essentially defined as lawsuits that are brought against auditors not due to an audit failure, but due to the client’s own failure. The client will sue the audit firm simply because they are the (only) ones who have the resources against which recovery can be made. Essentially, they are suing those who can pay up.
Large class-action lawsuits can be mitigated by ensuring that everything in the audit engagement is properly documented; as well, through the representation letter, clear statement of auditor’s responsibilities will serve as proof against unfounded allegations. As well, the audit firm should avoid any other contact or additional duties with the client beyond the actual audit work which can be