What was the CPA’s deficiency in conducting the audit of accounts receivable?

Auditing P 5-22 In confirming accounts receivable on December 31, 2009,
the author found 15 discrepancies between the customers’ records and the
recorded amounts in the accounts receivable master file. A copy of all
confirmations that had exceptions was turned over to the company
controller investigate the reason for the difference. He, in turn, had
the bookkeeper perform the analysis. The bookkeeper analyzed each
exception., determined its cause, and prepared an elaborate spreadsheet
explaining exceptions were caused by timing differences in the
bookkeeper’s report indicated that the exceptions were caused by timing
differences in the clients’ and customer’s records. The auditor reviewed
the spreadsheet and concluded that there were no material exceptions to
accounts receivable.

Two years subsequent to the audit, it was
determined that the bookkeeper had stolen thousands of dollars in the
past 3 years by taking cash and overstating accounts receivable. In a
lawsuit by the client against the CPA, an examination of the auditors
December 31, 2009, accounts receivable working papers, which were
subpoenaed by the court, indicated that one of the explanations in the
bookkeeper’s analysis of the exceptions was fictitious. The analysis
stated the exception was caused by a sales allowance granted to the
customer for defective merchandise the day before the end of the year.
The difference was actually caused by the bookkeeper’s theft.

Required:
a. What are the legal issues involved in this situation? What should the auditor use as a defense in the event that he is sued?
b. What was the CPA’s deficiency in conducting the audit of accounts receivable?

 

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