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Something Went Sour at Parmalat1.

What steps does an auditor ordinarily take when confirming


cash balances held on depositswith financial institutions? Standard bank confirmation requests
should be signed by a client officer. Banks usually will notrelease information without client
permission. Auditors should be very careful that the banks address is reliable and not subject to
alterationby the client in such a way as to misdirect the confirmation. The request should seek
information the recipient can supply, like the amount of a balance. The audit firm should control
and mail the confirmations, not be given to client personnel formailing. Auditing standards
requires direct communication. Responses should be returned directly to the audit firm, not to
the client.2. What additional steps should the auditors have taken when they received the
smudged faxcopy printed on Bank of America letterhead?When receiving a questionable piece of
evidence, the auditor should follow up immediately tocorroborate the evidence. In this case, the
auditors should have followed up immediately bytelephone using a phone number obtained from
a nonclient source (e.g., an internationaltelephone book or Internet Web site). The audit team
should also have requested that, in additionto the faxed copy, the original confirmation be mailed
directly to them. In terms of evidence, asigned original is preferable to a faxed confirmation for
billions of dollars.
3. What red flags did the auditors miss?The auditors missed several red flags:1. The size and
location of the cash account should have been a red flag. It is very unusual for alarge company to
have so much cash in a (foreign) bank account.2. Between January 2000 and September 2003,
Parmalat raised more than $5 billion in debtofferings. With so much cash available, why was
Parmalat continuing to borrow money?3. The smudged fax verifying the balance was highly
suspicious. Where was the original? Was itsent directly to the auditors?4. What steps should
Deloitte & Touche SpA have taken with respect to Grant Thorntons auditof the Cayman Island
subsidiaries?This issue is a tricky one because the firm is dealing with another audit firm
conducting asignificant part of the audit. However, when large balances make up a significant
portion of acompanys consolidated balance sheet (in this case, 38 percent of Parmalats assets
were in thesubsidiarys bank account), auditors should take additional care to obtain
additionalcorroboration. They certainly should have visited the other auditors offices to examine
theirworkpapers