Phar-Mor Inc

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Assignment 1: Phar-Mor Inc
By: Rich Allen
SID: 250421110
Date: July 18th, 2013
Prof: M. TeKare

1a). A company would want to hire a member of its external audit for a number of reasons. The external auditor would have extensive knowledge of how the company works due to analyzing statements and performing many audit procedures and tests on the company and therefore would reduce time in order to become effective as an employee. The company would know the former auditor personally and have a good idea of how they would fit in with the existing staff. The former auditor could prepare working papers and assist with the auditors to reduce the time and cost of the audit. However, the former external auditor would know what the existing auditors would examine when conducting an audit. This also could lead to the company committing fraud or using creative accounting to misstate numbers on the financial statements. For example, in Phar-Mor, the company knew that the auditors would spend a lot of time looking at inventory due to Phar-Mor being in a retail industry. The external auditor now working for Phar-Mor could inform management of the tests that the auditors would perform on inventory and therefore would give an idea to management to how they could inflate the inventory numbers.

1b). If the client has hired former auditors, it would affect the independence of the existing auditors. The main factor that would threaten independence in this case would be the familiarity threat, which occurs when it is difficult to behave with professional scepticism during the engagement due to a belief that one knows the client well. If the former auditors and existing auditors worked for the same firm, it is very likely that they had worked together quite a bit in the past and could be friends or at least business associates. This could lead to the existing auditors being less inquisitive and more satisfied with explanations when conducting the audit and could lead,

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