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.
Required:
a. Based on the above information, which assertion(s) for sales should the auditor be most concerned with? Why?
b. Based on the above information, which assertion(s) for accounts receivable should the auditor be most concerned with? Why?
c. What audit evidence should the auditor gather to verify the assertion(s) for sales and accounts receivable? Be specific as to how each type of evidence relates to the assertions you mentioned in parts (a) and (b) of this question.
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?
b. 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?
Sources: M. Maremont, J. Eisinger, and J. Carreyrou, “How High-Tech Dream at Lernout &Hauspie Crumbled in a Scandal,” The Wall Street Journal (December 7, 2000), pp. A1, A18; J. Carreyrou and M. Maremont, “Lernout Unit Engaged in Massive Fraud to Fool Auditors, New Inquiry Concludes,” The Wall Street Journal (April 6, 2001), p. A3; and J. Carreyrou, “Lernout Unit Booked Fictitious Sales, Says Probe,” The Wall Street Journal (April 9, 2001), p. B2.
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