Audit Quality

Topics: Auditor's report, Audit, Auditing Pages: 4 (1237 words) Published: October 15, 2010
Fraud at Parmalat
Parmalat, the international dairy giant with 139 business units in 30 countries of more than 40 years history (Hamilton & Micklethwait, 2006) stepped on its way to meltdown due to its aggressive business strategy of worldwide expansion in the early 1990s. In order to cover the financial deficit caused by inefficient factories, poorly managed inventory and costly acquisitions in the long era expansion (Hamilton & Micklethwait, 2006) and to hide embezzlement to prop up failing family businesses, a constant infusion of cash is necessary. However, cash could only be obtained if investments in Parmalat are seemed to be sound and attractive (Parmalat Case Study, 2009). Under this circumstance, Parmalat successfully used a number of offshore investment vehicles to create misleading transactions with the help of auditor Grant Thornton, financial institutions such as S&P and a series of banks.

The fraud was conducted in Parmalat through a series of action. Firstly, they created false and forged documents to create fictitious amount in the bank account. Then, they could over leverage the asset. After that, they pocketed the money obtained from the leverage in private. Meanwhile, they covered liabilities by using derivative financial instruments and complex financial transactions. (Parmalat Case Study, 2009)

Audit failure to ‘cash and cash equivalents’
Given the risk of cash manipulation, auditor should have focused more on two main types of assertions in relation to ‘cash and cash equivalents’ before issue an audit opinion.

One is about account balances. It requires GT-Italy to focus on both bank confirmation and tests of bank reconciliations (Gay and Simnett, 2010). Yet, GT-Italy did not undertake enough work and failed to fulfil its duty as a quality control device: it is believed that the account confirmation from Bank of America was created by Parmalat’s main office (Swartz, 2004). Whether GT-Italy has intention not to request...
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