1. At Crazy Eddie, the management team established deceiving the auditors as a primary strategic objective. If management spends considerable time and effort on this goal, is it possible that the auditor can still fulfill his or her mission of ensuring the financial statements are not materially misstated? If so, what steps can an auditor take to overcome these types of situations?
2. How could the auditors have determined that the inventory balance was materially misstated? What changes to the audit plan would have been necessary to validate the existence and valuation of inventory?
3. In Crazy Eddie, the auditors work plan and results were viewed by the client, in part because the security of their workpapers was inadequate. Why is protecting the audit work product so important? In todays audit environment, what should auditors do to protect their work product? What might auditors do in todays audit environment that could expose their work product to individuals not engaged in the audit?
4. Why is the primary purpose of analytical procedures performed during the planning steps of the audit? Please identify the warning signs that were revealed about the inventory balance during analytical procedures that were ignored by the auditors.
5. Crazy Eddie focused on making the company look extremely profitable just prior to the IPO. Why was this important? Does this make a client that is in the process of issuing an IPO a higher-risk client? Why or why not? Are there other risks to the auditor when an IPO is included in the engagement?
6. When Touche Ross became the new audit firm in 1997, what additional steps is the new auditor required to complete during the audit process? Are there any other steps that the audit firm should take?