CBI Holding a New York based firm serves as the parent company for several wholly owned subsidiaries. Ernst and Young became CBI’s independent auditors and performed audits for CBI’s financial statements from 1990 through 1993. Ernst and Young failed to investigate the alleged advances and conform to clients facts which may include investigating credit limit and analyzing vendor’s payable accounts. Instead the auditors record in their work papers the client’s feeble explanation for the advances. After investigations from a former CBI accountant and CBI controller, Ernst and Young have determined that CBI auditors had failed to detect unrecorded liabilities because they had failed to properly perform a search. Yet, Ernst and Young did not notify CBI’s board of directors of the 1992 and 1993 audit errors. Nevertheless, Ernst and Young made an effort to retain CBI as an audit client after determining that the 1992 and 1993 audits have been unsatisfactory. Research Question
Did Ernst and Young have an obligation to inform CBI management of their failure to determine the true nature of the advances prior to seeking the “reaudit” engagement? Authoritative Literature
(AU 561 - .04) states that, “When the auditor becomes aware of information which relates to financial statements previously reported on by him, but which was not known to him at the date of his report, and which is of such a nature and from such a source that he would have investigated it had it come to his attention during the course of his audit, he should, as soon as practicable, undertake to determine whether the information is reliable and whether the facts existed at the date of his report. In this connection, the auditor should discuss the matter with his client at whatever management levels he deems appropriate, including the board of directors, and request cooperation in whatever investigation may be necessary.”
(AU 561 - .05) mentions the need to...