Audit and Assurance Practice Exam

Which statement about the Medicis fraud is false?

1. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements-its allowance for doubtful accounts.

2. The audit was conducted without any major findings.

3. The fraud was discovered due to an internal whistleblower report.

4. Medicis reported financial results that were consistent and transparent.

The correct answer is: The audit was conducted without any major findings.

The statement that the audit was conducted without any major findings is false because it downplays the significant issues and findings that were present in the Medicis fraud case. This incident highlights significant lapses in the audit process, specifically regarding the assessment of critical accounting judgments such as the allowance for doubtful accounts. The findings by the PCAOB emphasized that Ernst & Young (EY) and its partners did not sufficiently evaluate important components of the financial statements, which is contrary to the assertion that the audit was clean and without major findings. In actual practice, audits are designed to identify material misstatements, fraud, and weaknesses in internal controls, and in this instance, the fraud was serious enough to warrant significant repercussions. Additionally, the existence of an internal whistleblower report played a crucial role in uncovering the discrepancies in the financial reporting, again contradicting the notion of a faultless audit process. Understanding this context illustrates just how critical proper financial oversight and internal controls are to ensure transparency and accuracy in financial reporting.