case 4_6 - Group 8 Case 4.6 1 Members of Phar-Mors...

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Group 8 Case 4.6 1. Members of Phar-Mor’s financial management team were former auditors for Coopers & Lybrand. a. Many reasons account for why a company would want to hire a member of its external audit team. The foremost is because the member of the external audit team knows the procedures and processes that audit team is performing and exactly what they would be looking for. Thus, this can be very beneficial for a company because they can better prepare their financial statements and documents for the audit team. Yet this can also be extremely dangerous because it creates an opportunity to better cover up financial difficulties and better hide them from the external audit team. b. If the client has hired former auditors this definitely has an affect on the independence of the existing external auditors. If the former auditor was a partner or high up on the audit team, especially, it could heavily influence current auditors just because of the authority they used to have. In addition, if there are any close relationships between the former auditor and the existing auditors there is a problem with related parties and the influence they have. c. The Sarbanes-Oxley Act of 2002 instituted a requirement that publicly held companies must wait one year – also known as a “cooling off” period – before they can hire their auditor’s former employees or owners for key positions. Section 209 of the law also states that the state boards of accountancy should make an independent determination of whether a similar requirement should be enacted for nonpublic companies in their jurisdiction. d. We think the auditors should trust the executives of a client to the extent that it does not affect the external auditor’s independence. The auditor must maintain an attitude of “professional skepticism” and this carries to the management and executives of the company, not just the financial statements. The management and executives of the company are the individuals where an auditor consistently communicates with to gather
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case 4_6 - Group 8 Case 4.6 1 Members of Phar-Mors...

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