Case 6-2 Joker & Wild LLC

Joker & Wild LLC has just been sued by its audit client, Canasta, Inc., claiming the audit failed to be conducted in accordance with generally accepted auditing standards, lacked the requisite care expected in an audit, and failed to point out that internal controls were not working as intended. The facts of the case are that the auditors failed to find the accounting managers misappropriation of assets when he stole inventory and then improperly, knowingly, wrote down inventory for market declines.

Current market values of inventory were not provided to the auditors despite numerous requests for this information. The auditors relied on managements representations about these values, which understated inventory by 10 percent. The plaintiff client brought the suit against the CPA firm claiming negligence, asserting the firms failure to find the vice presidents misappropriations of inventory and false valuations damaged the company by prematurely recognizing losses and then causing large reversals in the subsequent fiscal year when the inventory was sold for 15 percent above the original cost. The defendant CPA firm sought to blame the client, claiming Canasta did not cooperate on the audit and the vice president overrode internal controls.

Questions:

1. In what way was the audit impaired (what was inadequate in regard to the performance of the audit)? Provide auditing standard guidance, properly referenced, to support your conclusion.
2. What additional audit procedure could Joker and Wild have completed once management refused to provide the information requested?
3. Given that Joker and Wild failed to conduct additional audit procedures, what type of opinion should have been issued? Support your conclusion with a reference to audit standards.