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ACCT 432 CASE 4.7 QUESTIONS AND ANSWERS

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CASE REPORT 4.7 QUESTION 2-5 2. Research PCAOB auditing standards (which can be found on the PCAOB’s website – www.pcaob.org) related to the use of confirmations and document the specific requirements related to maintaining control of the confirmation process. (a) Based on what you learn, provide an assessment of deficiencies in the confirmation approach, Satyam’s auditors took related to cash and accounts receivable. The deficiencies are: (1) The engagement team should not give the confirmation request to employees of Satyam, who were responsible for sending the confirmation requests to the bank. And the employees returned the alleged completed confirmation request responses to the audit team. Instead, according to the PCAOB Standard AU 330.28, the auditor should maintain control over the confirmation requests and responses. Maintaining control means establishing direct communication between the intended recipient and the auditor to minimize the possibility that the results will be biased because of interception and alteration of the confirmation requests or responses. The auditor should place confirmation requests in the mail by himself with the audit firm’s return address. The auditor should ask the recipient to send the completed confirmation back via mail to the auditor directly. (2) Though there was no response to the confirmation requests of the accounts receivable or the confirmation response from the bank directly was different from the response collected by the employee of Satyam, the auditor failed to take the following procedures. According to the PCAOB AU330.09, the auditor should assess whether the evidence provided by confirmations reduces audit risk for the related assertions to an acceptably low level. In making that assessment, the auditor should consider the materiality of the account balance and his or her inherent and control risk assessments. When the auditor concludes that evidence provided by confirmations alone is not sufficient, additional procedures should be performed. Also, the auditor should evaluate the results of confirmation procedure according to the PCAOB Standard AU330.33 and exercise an appropriate level of professional skepticism throughout the confirmation process according to the PCAOB Standard AU330.15. (3) These audit responses also failed to take into account the deficiencies they noted in Satyam controls. While there were 170 deficiencies in internal control including eight significant deficiencies that indicated a heightened risk related to accounts receivable, a greater assurance was needed to be taken by the auditor from substantive tests related to a financial statement assertion according to the PCAOB Standard AU330.07. (b) Do auditing standards require the use of confirmations in the audits of cash balances and accounts receivable balances? When facing the audits of cash balances and accounts receivables balances, the requirements of the use of confirmations are different. (1)For cash balances, there is no requirement shown in the auditing standards which means confirmation in audit of cash balances is not a must. But in fact, it is performed in most audits.

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