Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals and fraud allegations sent the company’s stock crashing and forced the firm to seek bankruptcy protection in Belgium and the United States. The following selected information pertains to L&H’s sales and accounts receivable:
Consolidated revenue increased 184 percent from the 1997 fiscal year to the 1998 fiscal year.
Revenue in South Korea, which has a reputation as a difficult market for foreign companies to enter, increased from $97,000 in the first quarter of 1999 to approximately $59 million in the first quarter of 2000.
In the second quarter of 2000, sales grew by 104 percent but accounts receivable grew by 128 percent.
Average days outstanding increased from 138 days in 1998 to 160 days for the six-month period ended June 30, 2000.
Part II. L&H’s auditor did not confirm accounts receivable from customers in South Korea. However, The Wall Street Journal contacted 18 of L&H’s South Korean customers and learned the following:
Three out of 18 customers listed by L&H stated that they were not L&H customers.
Three others indicated that their purchases from L&H were smaller than those reported by L&H.
Required: a. If L&H’s auditor had confirmed these receivables and received such responses, what additional evidence could he or she have gathered to try to obtain an accurate figure for sales to and accounts receivable from customers in South Korea?
Answer : First thing is that , auditors should have examined documentation of the sales transactions, particularly searching for weather there are valid sales orders or not and evidence that the products sold worshipped. Secondly the auditor also Should have considered sending additional confirmations to a larger number of customers, perhaps asking the customer to fill in the dollar amounts because there is so much doubt about the accuracy of L&H’s figures.
- If you were L&H’s auditor and you had received such responses from South Korean customers, how likely would you be to use inquiry of the entity’s personnel as an audit procedure? Why?
Answer :
If I was L&H’s auditor and I had received such responses from South Korean customers ,this confirmation responses suggest that management integrity likely is low, especially those that stated they were not a customer of L&H’s. Therefore, the auditor would be unlikely to use inquiry of the client as an audit procedure.
