Phar-Mor Case Study
Phar-Mor Case 4.6 Questions
1. a) By hiring a member of its external audit team a company could gain insight into the auditor’s process and better devise methods of hiding fraud. b) Hiring a former auditor would greatly compromise and possibly impair the existing external auditor’s ability to remain independent. On top of having knowledge about the auditor’s practice, preexisting relationships could cause bias in the audit outcome. c) Sarbanes-Oxley Act 2002 limits the ability of corporations to hire employees of their external audit firms. Sox requires a “cooling-off” period of one year, after the audit commencement date, before a member of the auditing team can begin work in a key position with the client. d) It is not appropriate for auditors to trust executives of a client. AU section 230, auditors should exercise “due professional care in the performance of work”, hence apply professional skepticism. The auditor should be impartial to the level of management’s honesty and pursue factual evidence to support findings and conclusions. 2. a) The client can be in a more powerful position than the auditor in the auditor-client relationship if the auditor is trying to sell the client additional services. b) SOX prohibits external auditors from providing certain services to clients including: • bookkeeping or other services relating to the accounting records or financial statements of the audit client; • financial information systems design and implementation; • appraisal or evaluation services, fairness opinions or contribution-in-kind reports; • actuarial services;
• internal audit outsourcing services;
• management functions or human resources;
• broker or dealer, investment advisor, or investment banking services; • legal services and expert services unrelated to the audit; 3. a) If I were an Equity investor, I would pursue legal action against the auditors if there was a reckless misrepresentation and lack of due diligence in verifying...
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