Question

PTL Club –The Harbinger of Things to Come?

DISCUSSION QUESTIONS

1. Although audit reports should provide assurance to investors and creditors that financial information presented is free of material misstatements and in accordance with GAAP, should audit reports be used to solicit investments, credit, or sales in a manner similar to Jim Bakker’s? How can a CPA firm prevent such behaviour?

2 During the trial, Mary K. Cline, senior auditor for Deloitte, Haskins and Sells stated:

“Well, we made a lot of judgments during the audit, and we were auditing the balance sheet as of May 31, and there was no reason in my judgment to look at this number after May 31.”⁶

a. Should the oversale of lifetime partnerships be classified as a subsequent event?

b. Should Deloitte have evaluated the sales occurring after the balance sheet date of May 31, 1984?

c. Should L&H have been aware of the sales limits on lifetime memberships? If so, what should they have done about it?

3. Why do you think audit firms are willing to accept high-risk clients?

4. What analytical and audit procedures could have led Deloitte and L&H to have more easily detected and reported PTL Club’s financial problems?

5. Why would a staff auditor want to be “part of the client’s team” and consent to questionable practices rather than being an “independent watchdog” and contest such practices?

6. How could the auditors have known and understood the PTL business better in order to audit more efficiently and effectively?

7. Is it the auditors’ responsibility to verify that the client meets tax-exempt status?

8. Did the preparation of checks violate the auditors’ Code of Ethics?

Answer 1

1) Using the audit report on the financial statements is not restrained as long as the information given by it is not misleading. When they use the audit report in their financial statements and show it to their investors , it assures the investor thereby adds to the decision making of actually investing in the company because they see that the information is real and not misleading.

The way that a CPA firm can prevent behavior like this is by talking to the client and having a good relation with them, they should be informed not to misuse the auditing report. They can also prevent this by stating it in their engagement letter and saying that the report cannot be used for those purposes.

2)a)Yes, the over sale of a lifetime partnership should be qualified as a subsequent because the audit report had the dates of Aug. 31, 1984 and Oct.24 1985

b)Yes, Deloitte should have evaluated the sales occurring after the balance sheet date because they admitted that over sale had occurred after the end of the year so it is their responsibility to report the subsequent events that happened.

c)Yes, it is L&H responsibility to be aware of the sales limits on life time memberships, they should have effectively audited the company.

3)First of all they are professionals that understand the financials of business meaning it know how accounts run in a company, because they are confident about their field of work. Risk is just a part and parcel of any business and a risky client will provide them a challenge to oversee and correct any risk of material misstatement .simply ,they will accept a risky client when they know that the outcome will exceed the risk. When they know that they will be getting a good outcome they will go and take the risk.

4)They can use many analytical procedures but the best analytical procedure that they can use can be a vertical common size financial statement. The audit procedures that would have helped him detect red flags would be clear audit procedures.