As an example of difficulties that auditors experience in collecting confirmations of cash balances, consider the Parmalat fraud that was exposed in 2003. In that case, the company overstated cash by about $5 billion, which reflected a fictitious amount in a Bank of America account in the Cayman Islands. The Italian segment of the audit firm, Grant Thornton, received a cash confir- mation that noted no exceptions to the confirmation the audit firm had sent. Parmalat accomplished the deception, in part, by providing the audit firm with a fictitious bank mailing address.
a. What role does the concept of materiality play in the substan- tive testing of cash balances?
b. How might the Internet and associated electronic confirmation processes help to avoid fraud associated with cash confirmations?
c. What are two or three key factors the auditor might consider that could have indicated that the cash account was a high-risk account for this client and would require more skeptical audit work?