Questions

1.BDO Seidmans attorneys pointed out correctly that professional standards do no

t prohibit auditors and client personnel from being friends. At
what point do such relationships result in violations of the auditor independe
nce rules and guidelines? Provide hypothetical examples to strengthen your answ
er.
2.According to court testimony, on July 20, 1995, Drew Bergman recommended to HM
Is board of directors that Mei-ya Tsai be hired as
the companys chief accounting officer (CAO). One week later, BDO Seidman issued
its audit report on HMIs 1995 financial statements.
Under presently existing professional standards would this situation have pres
ented an independence problem for BDO Seidman? Defend your answer.
3.Under what circumstances is an inventory rollback typically performed? How va
lid is the evidence yielded by this audit procedure? Explain.
4.Jill Karnick abandoned her attempt to complete an inventory roll forward becau
se of the considerable amount of work the procedure
involved. Do you believe she made an appropriate decision given the circumsta
nces she faced? How should auditors weigh the cost
of an audit procedure, in terms of time and other resources, against the quant
ity and quality of evidence that it yields?
5.Should the results of inconclusive audit tests be included in audit workpapers
? Defend your answer.
6.A major focus of the trial in this case was BDO Seidmans consideration of, and
response to, the red flags apparent
during the 1995 HMI audit. Define or describe the phrase red flags. Explain the
impact of red flags identified by auditors on each major phase of an audit.
7.The PSLRA requires auditors to report to the SEC illegal acts that would have a
material effect on a clients
financial statements, assuming client management