The audit of Meteor Technologies in 1989 completed by Gilmore Bennington and Peter Zalenti of W&P had many egregious errors. Three major issues in this case will be stated and analyzed firstly.
* W&P auditors’ failure to obtain competent evidence to develop a reasonable opinion. * The lack of mental independence by the auditors, especially W&P partner Bennington. This was evident in Bennington’s lack to challenge the Meteor’s CFO on issues presented by the auditing team. * Throughout the audit process, W&P failed to exercise due care in their performance of professional services.
Professional skepticism was not able to be finally exercised due to ethical pressure. As stated above, the general standards of GAAS were not met during this audit. First, Evidence was lacking or insufficient in the majority of decisions made by Bennington. Bennington failed to ensure competent evidence when accepting Meteor’s appraisal value of SJA at $1. 5 million. It was worth noting that W&P used a copy of draft agreement rather than the final version to assess the advances of SJA.
With low completeness and certainty, the draft should not have been used as a competent evidence for auditing.A similar situation occurred in ST-100 inventory evaluation. Bennington took Meteor’s CFO opinion on how to handle the reserves for the ST-100 inventory without receiving any documentation to defend the adjustment. Meteor’s CFO also provided their attorney’s opinions regarding the collectability of their bad debt in regards to the sale of ST-100 array processors. While these opinions provided evidence to the collectability of the bad debts, it did not provide enough information to accept the much lower adjustment suggested by Meteor’s CFO.Most issues of insufficient evidence obtained by auditors were related to Bennington’s lack of mental independence of Meteor’s management.
Bennington accepted many revisions by Meteor’s CFO without competent evidence to defend his assumptions. In addition to the ST-100 inventory issue stated above, Bennington also took the words of Meteor’s CFO as fact in several places even though members of the audit staff had questioned the CFO’s revisions. Bennington relied on questionable indirect evidence provided by Meteor’s CFO instead of gathering his own direct evidence.This included the revisions to Meteor’s inventory, fixed assets, debt, and reserves for bad debt.
It can be concluded that all of the CFO’s proposals stated above were trying to overstate the asset value on the balance sheet. Based on the analysis, the relationship between Bennington and Meteor was questionable. The third main issue is the lack of due professional care in the performance of audit. When the auditors reviewed the SJA transaction they challenged if the advance payments to SJA should have been recognized as an expense instead of being treated as an asset.Bennington informed Meteor’s CFO of the issue in question which allowed him to adjust the final version in the financial statements as a “working capital agreement” instead of a “joint research and development agreement”.
Zalenti, as a senior manager, had failed to plan and supervise the audit process adequately. One week prior to the conclusion of the Meteor audit, Zalenti left the audit for an out-of-town assignment. Therefore, he could not sign-off on the work papers on time. When he returned he would have had to backdate his signature for the audit to before the audit was released.According to GAAS, the auditor must obtain a sufficient understanding of the entity to design the nature, timing, and extent of further audit procedures.
The advance payment from Meteor to SJA is not presented in accordance with GAAP. Also, all R&D accounts were deleted and the final version described the agreement as a working capital agreement without any consideration about GAAP. The auditor must either express an opinion regarding the F/S or state that an opinion cannot be expressed in the auditor’s report.Although the work papers contained materially incorrect conclusions, Zalenti signed-off on the work papers. In addition, the audit report had been publicly released before the senior manager’s sign-offs by breaking W&P’s policy. Besides, proper disclosure has not been made about Meteor’s acquisition of SJA.
The difference between the draft and the final agreement should be disclosed as well. It is clearly evident that the audit performed by W&P upon Meteor’s Technologies, Inc failed to meet the GAAS standards.The lack of mental independence, professional care, and competent evidence were the primary failures that led to potentially materially misstated financial statements by Meteor’s Technologies. Bennington failed to collect direct evidence and often relied on incomplete indirect evidence provided by Meteor’s CFO.
Zalenti showed his lack of professional care by not being present for the entire audit as well as signing off on the audit even though he believed there were material differences. The multiple auditing issues present led to misstated financial statements that should have been released with a disclaimer opinion from W&P.
