Halvorson & Co., CPAs, was hired as the auditor forMachinetron, Inc., a company that manufactured highprecision,computer-operated lathes. The owner, Al Trent, hired Halvorson toconduct the upcoming audit and assist with an initial publicoffering registration with the SEC. Because Machinetron’s machineswere large and complex, they were expensive. Each sale wasnegotiated individually by Trent, and the sales often transpiredover several months. Improper recording of one or two machinescould represent a material misstatement of the financialstatements. The engagement partner in charge of the Machinetronaudit was Bob Lehman, who had significant experience auditingmanufacturing companies. He recognized the risk for improperrecording of sales, and he insisted that his staff confirm allreceivables at year end directly with customers. Lehman conductedhis review of the Machinetron audit files the same day that Trentwanted to file the company’s registration statement for the initialpublic stock offering with the SEC. Lehman saw that a receivablefor a major sale at year-end was supported by a fax, rather thanthe usual written confirmation reply. Apparently, relations withthis customer were “touchy,” and Trent had discouraged the auditstaff from communicating with the customer. At the end of the day,there was a meeting attended by Lehman, Trent, the underwriter ofthe stock offering, and the company’s attorney. Lehman indicatedthat a better form of confirmation would be required to support thereceivable. After hearing this, Trent blew his stack. Machinetron’sattorney offered to write a letter to Halvorson & Co. statingthat in his opinion, a fax had legal substance as a validconfirmation reply. Lehman, feeling tremendous pressure, acceptedthis proposal and signed off on an unmodified audit opinion. Anycomments to Lehman?
