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 securities would include confirmations, security inventory report and examine securities on hand. “Ordinary negligence is the failure to exercise due professional care, whereas gross negligence is a reckless departure from due care. Gross negligence may be also considered to be constructive fraud. Fraud requires the element of intent to deceive” (Business Forum). The level of failure that was exhibited by Friehling ; Horowitz was all three.
They exhibited ordinary negligence by simply not performing the tasks of the audit. They exhibited gross negligence by not performing tasks of the audit, not testing the internal controls and not even looking into the large bank account that all the cash flowed through. Those are major areas that must be addressed in an audit and were completely disregarded by Friehling ; Horowitz. These major areas do represent the possibility of a fraud being committed between the auditors and the company.
There is a possibility that there might be small mitigating factors to help defend the actions of the auditing firm but they are really no excuses for why they could not perform their job. If they have taken this engagement on, then they should have performed the specified tasks. We do believe that the auditing firm should be held criminally responsible for a fraud committed by its client’s management team because partners and other management should have been reviewing the auditors’ work and would have noticed that lots of the pieces of the audit were missing.
The firm is sending the message that they hire these auditors that do not do thorough work and do not follow up with the proper paper work regarding audit reports and financial statements. It is the firm’s responsibility to perform the audit and by following all standards and when those standards are violated it is the firm who will be held responsible. Friehling should be facing criminal charges because he was not performing a thorough audit and if he had been then he would have been able to see some of the red flags of Bernie Madoff’s scheme.
This would have allowed Friehling to uncover the fraud and protect the innocent clients who were losing all their money. Works 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;.
Cite this Audit and Investment Securities
Audit and Investment Securities. (2018, Jun 24). Retrieved from https://graduateway.com/audit-and-investment-securities-essay/