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Q1. Before accepting the new engagement, the succeeding external auditor (i.e. Ernst & Young, also known as EY) is required find out more information regarding the company (i.e. Olympus) from external sources as well as the preceding auditor (i.e. KPMG). Upon approval from Olympus, KPMG is required to share the company’s background with EY. Moreover, EY is expected to find out the reason why KPMG ended its engagement with Olympus.
With the benefit of hindsight, KPMG should have exercised a higher level of professional skepticism when auditing Olympus. They should have investigated deeper before verifying the external report provided by Olympus and performed third-party inquiry personally instead of placing complete trust on the management. KPMG should also have disclosed the scope limitation in the opinion report instead of issuing an “unqualified opinion”. Upon withdrawal from the engagement, KPMG should have shared about Olympus’s corporate culture, internal controls and the reason for withdrawal the engagement with EY.
On EY’s part, they could have considered the option of not taking up the engagement to audit Olympus as the inability to obtain certain information on Olympus’ past dealings was an indication that management did not want to co-operate fully
Q2a. With reference to SSA200, an external auditor should exercise professional skepticism during their audit with an attitude to have a questioning mind and be alert to conditions which may indicate possible misstatement due to fraud, and a critical assessment of audit evidence. In this case, KPMG and EY might not have been critical enough in pressing for more persuasive evidence. They also failed to obtain enough information to clear the doubts about certain disagreements within Olympus’ accounts. Such accounts include acquisitions and recorded goodwill of excessive advisory fees.
However, according to SSA240, the primary responsibility for the prevention and detection of fraud rests with Olympus’...
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