Introduction
The main issues with Parmalat include the ineffective audit planning process and risk management. The company was involved in the fraud and misrepresentation of the financial statements. In addition, due to ineffective audits the company had to face severe consequences at the end. There is a need to implement effective audit strategies and risk management process.
It is important for the auditors to confirm cash balances with the financial institutions that are used in the cash reconciliation of the company like Parmalat. By using standard from confirmation, the auditor requests financial institutions to confirm by examining their records about the client’s cash balance along with loans taken by the client from those institutions. Other types of information are confirmed by requesting to financial institutions through separate letter. For instance, an auditor requests to the member of financial institution about the financial arrangements made by the client like guarantees made by the client on other party’s obligation. The confirmation request and letter both are sent through mail with post stamp and required legal documents. In case of weaknesses in the internal control, the auditors trace accounts and involve in recalculation of cash balance to verify the balances (Crumbley & Zabihollah, 2004).
Questionable Evidence
The business risk strategy is important to use by the auditor to identify issues related to auditing processes (Gramling, Johnstone & Rittenberg, 2012). In case of discrepancies in records, conflicting evidence, circumstances that identify fraud and the need for audit processes the auditor’s skepticism needs to be heightened (Whittington, 2015). Moreover, in case of receiving questionable evidence the auditor should follow up with the bank through telephone. The phone number should be taken from the non-client source. Confirmation request should also be made to provide original signed copy from bank through direct mail.
Red Flags
Red flags are the clicks to a potential fraud. Hence, internal auditors are required to keep on track of these red flags. Nevertheless, most of the time internal auditors fail to detect frauds. For instance, the auditors missed the red flag of size and location of cash account. In addition, one of the red flags was debt raised by Parmalat despite the availability of cash. Moreover, smudged fax was the red flag missed by auditors. The company did not plan the audit effectively as there was no strategy for the engagement and development of audit plan. In addition, there were no planned risk assessment processes and responses to potential risks like material misstatement.
Steps to Effective Audit
The auditor should have performed preliminary engagement activities, such as performing audit engagement processes, determining the compliance with respect to independence and corporate governance needs, and understanding the requirements of audit engagement in relation to audit committee.
The auditor should have planned audit activities by gathering information about the internal controls of company, evaluating circumstances affect the industry, understanding control deficiencies, and gathering information about the risks regarding company, etc.
The auditor should have developed audit strategy, action plan and involve in multiple engagements.
References
Crumbley, D. L., & Zabihollah, R. (2004). US master auditing guide. USA: CCH.
Gramling, A. A., Johnstone, K. M., & Rittenberg, L. E. (2012). Auditing. USA: Cengage Learning.
PCAOB. (2016). Audit Planning. Retrieved from: https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_9.aspx
Whittington, O. R. (2015). Wiley CPAexcel Exam Review 2016 Study Guide January: Auditing and Attestation (Vol. 1). USA: John Wiley & Sons.
