In late 1998 and early 1999, Your Best Magnets Inc. (YBM) offices in New York and Toronto were raided by the U.S. Organized Strike Force and the Royal Canadian Mounted Police. Records were seized, and the public company and its officers were charged with money laundering. The company has since been delisted and court proceedings continue. One newspaper article showed the flow of a single YBM transaction of $2.3 million being split into different amounts, moving among 10 different banks and as many different companies. Connections were shown with Russian organized crime.
Delskiny and Lather, CPAs, the auditors of YBM, were subpoenaed to appear before a grand jury in the United States.

REQUIRED

a. What are the auditor’s normal responsibilities during an audit engagement with respect to assessing management integrity?

b. How does the assessment of management integrity tie in to the nature of evidence to be collected during the audit?

c. Assume that one of the directors of YBM was a member of Russian organized crime, known to local and interna¬ tional police forces but not publicly known. What is the auditor’s normal responsibility regarding detection of criminal affiliations of directors?

d. How does the crime affiliation of directors or other manage¬ ment affect the fair presentation of financial statements?

e. The company’s financial statements in 1996 showed $13.6 million worth of North American magnet sales—a figure that exceeded total magnet imports to the continent that year. YBM officials created fictitious sales lists and destroyed banking records. Auditors identified question¬ able transactions, demanded explanations from manage¬ ment, and received supporting evidence. A clean auditor’s report was issued in 1996. Discuss the potential legal lia¬ bility of the auditors should it be discovered that several sales on the sales lists were to fictitious companies.