We do not believe that the auditors from Friehling & Horowitz exercised due care and maintained professional skepticism throughout the audit. According to the AICPA website, “due professional care imposes a responsibility upon each professional within an independent auditor's organization to observe the standards of field work and reporting” (AICPA). This is because the auditors should have been skeptical of Madoff’s bank account and Chase and should have looked into what that bank account was used for. The auditors should have also been skeptical about how Madoff was able to have a split-strike conversion strategy that he was able to yield “extraordinary results”. Due care was not exercised by the auditors because they did not perform independent verifications of the revenue, assets, liabilities of the client’s or for the purchase and custody of the securities of the company. The auditors also did not test internal controls which means that they expressed no professional skepticism or due care because they took management’s word for it that these controls were working fine or that they did not feel it necessary to perform audit work in general. As an auditor it is appropriate to obtain sufficient audit evidence with respect to the existence and valuation assertions associated with investments in the form of observable market prices, details of values in the underlying investments or audited financial statements of the alternative investments. The type of evidence that we would like to review to determine whether BLMIS had purchased investment securities would include investment contracts and invoices. The type of evidence that we would like to review to determine whether BLMIS had sold investment securities would include invoices, and confirming transaction in the entity’s account and performing the appropriate reconciliations. The type of evidence that we would like to review to determine whether BLMIS had maintained proper custody of investment...
Cited: AICPA. AU Section 230 Due Professional Care in the Performance of Work. November 1972. 4 December 2009 <http://www.aicpa.org/download/members/div/auditstd/AU-00230.PDF>.
Business Forum. Auditors beware: key factors can lead to lawsuits. Summer-Fall 1996. 4 December 2009 <http://www.entrepreneur.com/tradejournals/article/19104307.html>.
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