Question

1. List three strange/unusual/out-of-the ordinary factors associated with the Health Management, Inc.’s year end inventory-in-transit that should have alerted the BDO Seidman auditors that maybe they should have identified the inventory-in-transit as a high-risk account that required extra audit procedures.

2. List two auditing standards that Madoff Securities auditor David Friehling violated.

Answer 1

Inventory rollback is necessary as it can really check the existence and completeness of inventory.however there are disadvantages. Yes, it can validate the correct amount of inventory that should be reported since those inventories made after the cut-off date will not be included already and inventories in transit will be verified as well, but this procedure is too time consuming. Just like in the case, HMI's inventory is too large to perform a rollback

Another factor that affected this is the lack of the perpetual inventory system.

Request the usual documentation that HMI prepared for all inventory transfers. Verified that the inventory transfer documents were signed by both the shipping and receiving pharmacists, identified on the documents the pharmaceuticals reportedly included in the transfers, confirmed that the quantities and per unit prices of those pharmaceuticals agreed with the information previously provided to the auditors by HMI management.

Part 2:

Friehling has violated one of the most important general standards of independence set by the AICPA in the Codes of Conduct rule 101. According to rule 101-.06 a member of an audit engagement should be independent of mind which means, “the state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment… (AICPA Section 101). Friehling’s lack of professional skepticism has made him lose his independence as a CPA. Due to lack of independence, his professional judgment was at fault by having direct financial interest in Madoff’s Ponzi scheme. The whole audit process of BLMIS was illegal because Friehling has failed to notify the AICPA of his audit work and was not peer reviewed since 1993. Friehling has lied to AICPA about not performing any audit engagements even though he was performing audits with BLMIS. This cover up has enabled him to not be peer reviewed every three years by the AICPA and collect huge profits from Madoff’s Ponzi scheme. Friehling did not practice professional due care because he lied to the AICPA and the shareholders for many years.

Friehling failed the audit standards of professional skepticism by not being independent and having a direct financial interest in the BLMIS.

He also violated the standards of professional due care by lying to the AICPA and all of the stakeholders in the BLMIS.