Question

The officers of an oil refiner, trader, and hedger based in New York were arrested by the FBI for committing massive financial statement fraud. The executives used many schemes to perpetuate the fraud, one of which was to hide a $30 million accounts payable from the auditors and show it as a payable arising in the following year. To conceal the fraud, they altered purchasing records, using correction fluid, and provided only photocopies of the records to the auditors. The Big 4 firm that audited this company was later sued for audit negligence in not finding this fraud.

Required:
In your opinion, were the auditors negligent for accepting photocopies of purchasing records and not detecting this accounts payable understatement?

Answer 1

Yes. The auditors were negligent for accepting photocopies of purchasing records as these are not sufficient audit evidence to base a opinion on.

Step-by-step explanation:

As part of their professional skepticism, auditors must obtain sufficient audit evidence.

Audit Evidence must be reliable and relevant to be considered sufficient for the auditor to base their opinion.

Photocopies were not reliable as they do not contain the original signatures responsible personnel and may be altered.