Your research project is: 1) Go to the PCAOB's enforcement section on its website and select two settled cases to prepare professional memos for. One case must relate to the accountant's failure to...

PCAOB CASE STUDIES
MEMO 1: SANCTION ON DELOITTE MEXICO PARTNERS FOR DEFICIENCES AND MISREPRESENTATIONS IN AUDIT OF MEXICAN SUBSIDIARY
MEMO 2: SANCTION ON DELOITTE AND TOUCHE (DELOITTE SOUTH AFRICA) ON FAILURE TO COMPLY WITH AUDITING STANDARDS IN FOLLOWING INDEPENDENCE THROUGHOUT THE PROFESSIONAL ENGAGEMENT PERIOD
TABLE OF CONTENTS
ACCOUNTING MEMO 1    1
ACCOUNTING MEMO 2    5
REFERENCES    10
ACCOUNTING MEMORANDUM 1 (ACCOUNTANT’S FAILURE TO COMPLY WITH ACCOUNTING AND AUDITING STANDARDS)
TO: Deloitte Mexican Partners
FROM: PCAOB Accounting Committee on behalf of Prestaciones Finmart
DATE: 31/7/2019
RE: Deficiencies and misrepresentations in Audit of Prestaciones Finmart, subsidiary of a US based giant EZCORP Inc.
FACTS:
On October 31, 2018, The Public Company Accounting Oversight Board (PCAOB) announced barring, fine and censured three Mexican Partners of Deloitte Mexico firm for deficiency in auditing the work of a Mexican subsidiary named Prestaciones Finmart of US based EZCORP. There were also misrepresentations about that work being communicated to the principal auditor of Deloitte Mexico, which is Deloitte US.
EZCORP, the US based company is a loan provider with its operations in several countries including US and Mexico. Finmart, the Mexican subsidiary served as payroll withholding lender. Due to misclassifications of loans by Finmart in 2015, EZCORP had to reinstate the financial statements of the fiscal years 2012, 2013 and 2014. This loan misclassification had to be adjusted under loan reserve and loan bad debt expense of the parent company accounts.
The Deloitte partners namely Galaz, Yamazaki and Ruiz Urquiza were sanctioned for failure in appropriation of loan and reserves to be evaluated in 2013 and 2014 financial statements. They did not test the accuracy of Finmart’s accounting system.
The Deloitte Mexico Partners have also failed to evaluate the operational effectiveness of some internal controls as per ICFR financial reporting of the subsidiary but communicated to their principal auditor Deloitte US as they had done so.
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The sanctions issued by PCAOB included barring the partners from working with any registered public accounting firm for a minimum of two years and imposed penalties of $50,000 each on Garcia and Valle and $30,000 on Guerrero.
Finmart Deloitte US
Deficiency work in auditing Misrepresentation
Deloitte Mexico Partners
ISSUES:
· Was there an internal control on the subsidiary company by the parent company’s accounting standards that has led to the misrepresentation of loans and reserves by Finmart which was omitted in checking by Mexico partners
· The wrong communication by the Deloitte Mexico partners to the principal auditor that they have checked the operational effectiveness of the restated financial statements filed by Finmart and ESCORP though there was deficiency work in the auditing
ISSUE 1 ANALYSIS:
Finmart had misclassification of certain loans in the fiscal years 2012 to 2014 which serves as the reason for reinstating the financial statements by ESCORP. This misclassification should have been detected the Deloitte Mexico partners which they failed to do so.
As per AS 2201, there is a requirement and set direction for an auditor to conduct an auditing related to management’s assessment of the operational effectiveness of internal control related to their financial reporting. This auditing of internal control of financial reporting can be integrated to audit of their financial statements. The Deloitte Mexico partners did not clearly audit the financial statements of Finmart which also included the misclassification
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of internal reporting. As per accounting standards, if there is more number of material weaknesses in the auditing of financial statements, the auditing of company’s internal control also cannot be considered effective as proper effective control related to financial reporting provides guarantee of financial reporting for external purposes like parent company’s reporting.
PURPOSE OF AUDITING OF INTERNAL CONTROL
The main purpose of the audit of internal control is to have an idea of the effectiveness of it related to the financial reporting of the company. If more defects in financial report exist, Then the auditor must conduct and plan audit to gain proper evidence that provides necessary support to have more assurance about the defects as of the date specified in the management’s evaluation. Even when the financial statements are not misstated, the defects in internal control may still exist.
CONCLUSION ISSUE 1:
The audit of financial statements must be integrated with...