1.13
1. Factors that likely contributed to the oversights made by the Ernst & Young auditors during the 2004 AA Capital engagement were the fact that Orecchio was not forced to pay back the “loan” immediately. Also Stevens, the CFO had been covering for Orechhio and his loans taken out on behalf of the company. The fact that
the internal auditors saw this money as a legitimate loan says that there may have been an inside job between Orechhio and the internal auditors going on, which was not noticed until Stevens went on maternity leave and Aquino stepped in.
Measures that audit firms can implement to minimize the likelihood of such oversights on audit engagements include understanding the company and its environment, understanding
the internal control over financial reporting, and inquiring understanding of the audit committee and management of the company.
2. I believe it was appropriate for Ernst & Young to decide not to rely on AA Capital’s internal controls during the 2004 audits because of the large sum of money that was in question. Also the fact that Ernst & Young’s internal controls were only made up of a
few people could easily strike up the question of internal fraud occurring.
Auditors can choose not to rely on a client’s internal controls when they feel their effectiveness is not in the best financial interest of the company. If an auditor feels that one or more material weakness exists within the internal control system of the company they may choose to not rely on them any longer.
3. Professional auditing standards require that auditors apply the following procedures to related-party transactions; obtaining an understanding the business purpose of the transaction, examining invoices, executed copies of agreements, contracts, etc., determine whether the transaction has been approved by appropriate officials, testing for reasonableness the compilation of the amounts to be disclosed in the financial statements, arrange for the audits of
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