Ligand Phamaceuticals sample essay
Describe what you believe is implied by the term “engagement risk. ” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?
I believe that the term “engagement risk” implies that inherent client-specific risks face an auditor throughout the course of an audit, thus creating a risk that the auditor will be unable to successfully assess and manage these risks in the performance of the engagement and properly issue an appropriate opinion. The auditor must understand these client-specific risks, which include, but are not limited to, significant events that affect the operations of the client, business risks facing the client, high-risk areas that require complex or subjective accounting treatments, and timely completion of the audit.
When a client proposes a higher than normal degree of engagement risk, the focus on the auditors’ professional responsibilities becomes even more imperative, as it is critical that the auditor perform at the highest level to provide the greatest possible assurance that the financial statements are presented fairly, in all material respects. What quality control mechanisms should major accounting firms have in place to ensure that audit partners have the proper training and experience to supervise audit engagements?
In any major accounting firm, ensuring that audit partners are qualified to supervise and audit engagement begins at the “top” of the organization and should be expressed through the actions of the firm. Partners should always be promoted and assigned to engagements based on their experience, training, and overall qualifications; never should promotions or assignment be based on anything other than absolute competency. Also, promotions and other considerations for employees and partners should be based on the quality of work performed, thus giving incentive across the firm to produce the best work possible in any situation.
Finally, firms should allocate significant resources to ensuring that employees are sufficiently trained, as well as enhancing existing quality control policies. Identify the accounting standards and concepts that dictate the proper accounting treatment for sales returns. How were these standards violated by Ligand? Accounting Standards Codification: •ASC 605-15-25 Recognition – Sales of products with right to return are recognized as revenue so long as they meet all of a list of conditions. ASC 605-15-45 Other Presentation Matters – For any sales made with a right of return in which the criteria in paragraph 605-15-25-1 are met revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns. •ASC 605-15-23 – Defines the factors that may impair the ability to make a reasonable estimate Ligand was able to comply with almost all of these standards. They did recognize revenues related to the sale of the products, and were able to make an estimate of the expected sales returns.
Where Ligand violated these standards was in ASC 605-15-23, where the lack of historical or homogeneous transactions impaired their ability to make an appropriate estimate. Ligand should have estimated a higher percentage of sales returns, rather than relying on their own expectations of what portion of the sold products would be returned. During the review of Ligand’s first quarter financial statements for 2004, the Deloitte auditors learned that the company had significantly underestimated its future sales returns at the end of 2003.
What responsibility, if any, did this place on the Deloitte auditors? To start with, upon learning of the error in estimation made by Ligand, Deloitte inherited the responsibility to recommend the correction of the previous year’s financial statements. This responsibility stems from two main facts. First, auditors are Certified Public Accountants and as such, have a responsibility to serve the best interests of the public. (Louwers 583) By not recommending a restatement of the financial statements, Deloitte would be knowingly allowing the public to rely on information that is not accurate.
Second, Deloitte should recommend the restatement to ensure that they are exercising due professional care, the lack of which could lead to lawsuit or penalty (which they eventually got). Since its inception, the PCAOB has been criticized by many parties. Summarize the principal complaints that have been directed at the PCAOB. Do you believe this criticism is justified? Explain. What measures could the PCAOB take to improve its effectiveness as a regulatory body?
In general, the main criticisms of the PCAOB are that it has not made sufficient it’s regulatory power, it is slow to act in its investigations of enforcement cases, and that it targets enforcement on smaller firms in order to protect the Big 4 firms, which are regarded as “too big to fail. ” While I do not disagree with the fact that the PCAOB is slow and has not produced a significant amount of regulation, I do disagree with the criticism of the PCAOB as a regulatory body in general.
I feel that certain members of the public desire absolute transparency in financial reporting, but do not understand the economy required to so. It is nearly impossible, not to mention impractical, to breakdown every aspect of a multi-billion dollar corporation to ensure that every transaction is accounted for accurately, but it is possible to give assurance that the financial statements are free of material error and are reliable to the users of them.
That is what auditors do and the PCAOB, even as a young entity, has ensured that audit firms have maintained that standard of reliability. To improve as a regulatory body, I think that the PCAOB could expand in size, as well as invest more resources into better understanding the areas in auditing that are the most difficult to provide assurance in.