Description

CASE STUDY

Moremoney & Associates, Chartered Acc. was hired as the auditor for Jamins Ltd, Inc.., a company that manufactured high- precision, computer operated lathes. The owner, Chick Viry, thought that Jamins Ltd was ready to become a public company, and he hired Moremoney & associates to conduct the upcoming audit and assist in the preparation of the registration statement for the securities offering.

Because Jamins Ltd’s machines were large and complex, they were expensive. Each sale negotiated individually by Chick Viry and sales normally transpired over several months. As a result, improper recording of one or two machines could represent a material misstatement of the financial statements.

The engagement partner in charge of Jamins Ltd audit was Fenty Fergy, who had significant experience in auditing manufacturing companies. He recognized the risk for improper recording of sales, and he insisted that his staff confirm all receivables at year end directly with customers. Fenty Fergy conducted his review of the Jamins Ltd audit files the same day that Chick Viry wanted to file the company’s registration statement for the public stock offering with the Security Co. Fenty Fergy saw that receivable for a major sale at year end was supported by fax, rather than the usual written confirmation reply. Apparently, relations with this customer were “touchy,” and Chick Viry had discouraged the audit staff from communicating with the customer.

At the end of the day, there was a meeting In Jamins Ltd’s office. It was attended by Fenty Fergy, Chick Viry, the underwriter of the stock offering, and the company’s attorney. Fenty Fergy indicated that a better form of confirmation would be required to support the receivables. After hearing this, Chick Viry blew his stack. Jamins Ltd’s attorney stepped in and calmed Chick Viry down. He offered to write a letter to Moremoney & Associates stating that his opinion, a fax, had a legal substance as a valid confirmation reply. Fenty Fergy, feeling tremendous pressure, accepted this proposal and signed off on an unqualified audit opinion about Jamins Ltd’s financial statements.

Six months after the stock offering, Jamins Ltd issued a statement indicating that its revenues for the prior year were overstated as a result of improperly recorded sales, including the sale supported by the fax confirmation. The subsequent Security Co. investigation uncovered that the fax was returned to the audit firm by Chick Viry, not the customer. Moremoney & Associates was forced to pay substantial damages, and Fenty Fergy was forbidden to practice before the Security Co. He subsequently left public accounting.

1.      Read the case above and identify violations of Generally Accepted Auditing Standards.

2.      You are required to list the tests of control and the substantive tests of transactions for the Cash Management Audit.