A lawyer has been contacted by someone who wants to sue an

accounting firm for an allegedly bad audit performed by the

accounting firm. The audit client has already filed for

bankruptcy, and the individual who contacted the lawyer lost a

bundle of money that he had loaned to the audit client. The

lawyer has contacted you to see if you might be interested in

working on the case.

He tells you that he is interested in whether the auditors

performed their work with the same standard of care as is

normally expected of members of the profession. He allows you to

sit there and examine the set of audit work papers which the

auditors had prepared when they did the audit.

From looking through the work papers, you see that the

auditors traced the balance of accounts receivable to the total

of the detailed records for each customer. The balance did not

agree, but the auditor doing that work noted that there had not

been a problem with this client the previous year, so he passed

on the matter instead of investigating it. There was no other

work done in the receivables area. There was not any

verification with customers of the balances claimed to be owed to

the audit client company, there was not any testing done to be

sure that shipments resulted in invoices which were then posted

to accounts receivable, and there was not any testing done to be

sure that amounts in accounts receivable actually represented

sales to customers.

When you ask the lawyer for more information, he tells you

that the allegation is that most of the accounts receivable never

even existed; instead, the company simply had documentation

parties at night after the auditors had left for the day, during

which they prepared phony documents to give to the auditors the

next day. How did client personnel know what phony documents to

prepare? Why, they simply received a listing from the auditors

of what documents the auditors wanted, and the auditors were

willing to wait up to a week to receive the documents.

Required:

a. Does the accounting firm which did the audit and issued

an unqualified opinion appear to be vulnerable?

b. If so, why? If not, why not?

c. Correctly cite any authoritative professional

literature which supports your answer.