Your firm has conducted the audit of a publicly-held company for the last three years. Due to management override of internal controls, a material fraud is included in the financial statements. The fraud, overstatements of inventory for several years, covered up the companyâ€™s rapidly declining financial position. The fraud was discovered by a new and unusually capable auditor working on the latest audit. The SEC was informed of the fraud immediately. Subsequent investigation showed that the company was near bankruptcy and the stock value dropped from $33/share to under $1/share. The perpetrators of the fraud are bankrupt.
If you were the partner of the audit firm, what would you want to know regarding the conduct of the audit? What were the auditorsâ€™ responsibilities, especially in regards to managementsâ€™ assertions?
If you were the partner, what types of evidence would you hope to find in the audit workpapers and why?
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