The SEC’s Case against California Micro Devices: A Lesson in Using Professional Skepticism and Obtaining Sufficient Appropriate Evidence
1. The third general standard, requiring the exercise of due professional care when practicing the audit and preparing the report, was violated since Michael and Brian didn’t take the responsibility to observe the standards of field work and reporting. In the case of the write-off of accounts receivable, they didn’t compare the information in the final press release with the spreadsheets given by the company’s chief accounting officer. The third standard of field work, which requires the obtaining of sufficient competent evidence matter, was violated because the substantial procedure for testing details of accounts receivable, including the confirmation of accounts receivable, was not executed appropriately. The sufficient appropriate audit evidence is principally gathered through tests and procedures. But in the case of the sales returns and allowances, Michael and Brian accepted $5.3 million as the correct number without taking further tests. 2. As for the confirmation of accounts receivable, a major audit activity is to contact customers directly and ask them to confirm the amount of unpaid accounts receivable at the end of the reporting period, or to send positive confirmation requests. This works primarily for larger account balances. Nevertheless, this may include a situation where a few random customers have smaller outstanding invoices. With respect to the write-off of accounts receivable, there are two steps involved in the audit procedure. The first step is to consider the reasonableness of bad debt expense and returns, and compare those with prior years. The second step is to examine the documentation and aging schedule related to write-offs over the period, and then decide whether they were properly authorized. For auditing sales return and allowance, the major activities are to examine whether returns were...
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