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Auditing Case

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Submitted By kab296
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Keith Parkinson
2/3/15
Auditing

Case 1: Merry-Go-Round

Merry-Go-Round (MGR) is a clothing retailer that was founded in 1968. The company’s locations were in malls that targeted the youth and teen market. In the late 1980s, the company was listed by Forbes magazine as one of the top 25 companies. By the early 1990s, sales fell due to stiff competition from other retailers. Facing bankruptcy, the company hired turnaround specialists from Ernst and Young (E&Y) to help overcome the financial crisis. However, the company filed for Chapter 11 reorganization and due to that a group of 9,000 creditors filed a lawsuit against E&Y saying they were the main reason for MGR’s decline. First of all, E&Y violated GAAS first standard that states, “The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.” The turnaround team included inexperienced personnel that included a retired consultant, a partner with little experience in the U.S. and with retail firms, and two recent college graduates. I would say the first standard of Field Work was violated because the work wasn’t adequately planned and there was no supervision. The leader of the team took an eight-day vacation at critical point during the engagement. Also, while store closing were key to MGR’s survival, only 230 of 1,434 stores had been closed and MGR still operated two stores in some malls. Last, the cost-cutting strategy called for only $11 million in annual savings, even though the company was projected to lose up to $200 million. In addition, even though there aren’t professional standards for CPAs who consult I think there should be guidelines or standards that CPAs can follow when consulting. If there was set of guidelines that E&Y had to follow then maybe MGR would’ve seen that E&Y wasn’t the best choice to help overcome

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