Crazy Eddie Case
Katherine Bokovsky
Wai Shan Leung
Auditing – Crazy Eddie Case
The main critical issue in the Crazy Eddie case is the incompetence and lack of professional skepticism of the company’s audit team and their inability to successfully comply with the standards of GAAS. The auditors failed to exercise the fundamentals of the substantive audit plan which would have uncovered at least some of the fraud. Furthermore, this inability and lack of knowledge on how to properly execute an audit threatened the independence of management and internal auditors as well as the outside auditing firm.
The first critical factor and a major component of GAAS is Rule 101 or “independence” of the auditor in all areas of the audit, which in the case of Crazy Eddie was fractured. Crazy Eddie’s accountants were former members of the firm conducting the audit, impairing independence. This is known as “independence in fact,” therefore the opinions of the auditors were compromised (Louwers, 43). Many auditors do not want to believe that their client is capable of committing a crime, and here we have them being former members which will surely cause a crack in the aspect of professional skepticism. They are going to be less likely to fully evaluate the evidence given (or in this case some requested documents were not even presented to auditors.).
The second critical factor is the lack of proper and effective internal controls in the organization and the auditor’s insufficient understanding of these controls under GAAS. A successful substantive audit plan includes a proper evaluation of internal controls but this audit plan was weak. When the auditor develops the audit plan they consider audit risk. The auditing firm providing consulting services to Crazy Eddie designed a computerized inventory system. It reduces the control risk if and only if employees used this system properly. However, Crazy Eddie ordered them to use the old manual system they previously used at the company. To say
Wai Shan Leung
Auditing – Crazy Eddie Case
The main critical issue in the Crazy Eddie case is the incompetence and lack of professional skepticism of the company’s audit team and their inability to successfully comply with the standards of GAAS. The auditors failed to exercise the fundamentals of the substantive audit plan which would have uncovered at least some of the fraud. Furthermore, this inability and lack of knowledge on how to properly execute an audit threatened the independence of management and internal auditors as well as the outside auditing firm.
The first critical factor and a major component of GAAS is Rule 101 or “independence” of the auditor in all areas of the audit, which in the case of Crazy Eddie was fractured. Crazy Eddie’s accountants were former members of the firm conducting the audit, impairing independence. This is known as “independence in fact,” therefore the opinions of the auditors were compromised (Louwers, 43). Many auditors do not want to believe that their client is capable of committing a crime, and here we have them being former members which will surely cause a crack in the aspect of professional skepticism. They are going to be less likely to fully evaluate the evidence given (or in this case some requested documents were not even presented to auditors.).
The second critical factor is the lack of proper and effective internal controls in the organization and the auditor’s insufficient understanding of these controls under GAAS. A successful substantive audit plan includes a proper evaluation of internal controls but this audit plan was weak. When the auditor develops the audit plan they consider audit risk. The auditing firm providing consulting services to Crazy Eddie designed a computerized inventory system. It reduces the control risk if and only if employees used this system properly. However, Crazy Eddie ordered them to use the old manual system they previously used at the company. To say
Bibliography: Carbonara, Peter “Takes one to know one” CNN Money Dec 25, 2007 Web Mar 1 2013 http://money.cnn.com/2007/12/21/news/newsmakers/antar.fortune/index.htm Louwers, Robert, David, Jerry & Jay “Auditing & Assurance Services” 5th Edition, McGraw Hill, 2013 Print Antar, Sam E. “The Crazy Eddie Fraud”, 2009 Web 2013 http://cepd.okstate.edu/cepd/files/crazyeddie.pdf