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...

References: * Callaghan, J. et.al., 2009, ‘Going Concern Audit Opinions and the Provision of Non Audit Services: Implications for Auditor Independence of Bankrupt Firms’. DOI 10.2210__91/17362
* Clarke, F. & Dean, G. 2007, ‘Independence: A Misplaced Quest for Honesty’ in Indecent Disclosure: Gilding the Corporate Lily, 1st ed., Cambridge University Press, Melbourne, 33-50.
* Clarke, F. & Dean, G. 2007, ‘Prologue: Gilding the Corporate Lily’ in Indecent Disclosure: Gilding the Corporate Lily, 1st ed., Cambridge University Press, Melbourne, 1-13.
* Executive Briefing 2004, ‘Italy food: Plenty of crying over spilt milk’ in Executive Briefing, 9 January.
* Gay, G. & Simnett, R. 2010, ‘Substantive tests of transactions and balances’ in Auditing & Assurance services in Australia, 4th ed., McGraw-Hill Australia, Sydney, 476-545.
* Hamilton, S. & Micklethwait A. 2006, ‘Parmalat: Milking the System’ in Greed and Corporate Failure: the Lessons from Recent Disasters, 1st ed., Palgrave Macmillan, New York, 153-172.
* O’Rourke, M. 2004, ‘Parmalat Scandal Highlights Fraud Concerns’ in Risk Management, 51(3), 44.
* Parmalat Case Study 2009, Parmalat Case Study 5, Documents for Small Business and Professionals, Retrieve: 3 October 2010, Available at:
http://www.docstoc.com/docs/18662743/Parmalat-case-study-5
* Swartz, N. 2004, ‘Evidence of Destroyed Documents at Diary Giant’ in Information Management Journal, 38(2), 14.
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