Questions

1. Analyze Take-Two’s 1998-2000 financial data included in Exhibit 1. Compute the following financial ratios for each of those years: age of accounts receivable, age of inventory, gross profit percentage, profit margin percentage, return on assets, return on equity, current ratio, debt-to-equity ratio, and the quality-of-earnings ratio. What major “red flags,” if any, were present in Take- Two’s financial statements given these ratios? Explain.
2. Identify the primary audit objectives that auditors hope to accomplish by confirming a client’s year-end accounts receivable. Explain the difference between “positive” and “negative” confirmation requests and discuss the quality of audit evidence yielded by each.
3. Identify audit tests that may be used as alternative audit procedures when a response is not received for a positive confirmation request. Compare and contrast the quality of audit evidence yielded by these procedures with that produced by audit confirmation procedures.
4. In your opinion, did the apparent mistakes made by the PwC auditors in auditing Take-Two’s receivables and reserve for sales returns involve

“negligence” on their part? Would you characterize the mistakes or errors as “reckless” or “fraudulent”? Justify your answers.

1. Is it appropriate for audit firms to sharply discount their professional fees for developmental stage companies? Why or why not? What problems, if any, may this practice pose for audit firms?
2. Do you believe that the relationship between Robert Fish and Ryan Brant was inappropriate? Explain.
3. Should audit firms accept “ethically challenged” companies and organizations as audit clients? Defend your answer.