Simply Soups Inc.: Case Analysis

MEMORANDUM

TO : Pamela Ude – Audit Manager
FROM : Maylinn Xu, Briceida Camacho – Audit Staff
DATE : November 2, 2015
RE : Simply Soups Inc. Cash Confirmation

Background – Positive Confirmations:
The purpose of this memorandum is to list that key procedures have been performed, integrities have been compromised, and professional standards were applied through the confirmation process. Positive confirmations send to and received by Simply Soups Inc. on November 2, 2015. These positive confirmations provide evidence to us when response is obtained from the recipient. The purpose of applying positive confirmation in this case is that contacting third party directly helps us to access outside party records

and compare it with records we received from clients in order to verify the accuracy of these information. Also positive confirmation is an efficient method to involve the client, the third party, and us directly to identify records reflecting transactions that have occurred between the client and the third party, and information provided to us is free from error or misstatement. Negative confirmation was not applied in this case because it only asks the client to reply only if the figure shown on record is incorrect, and it does not provide explicit evidence that the intended third parties received the confirmation requests and verified that the information contained on them is correct.

On behalf of evaluating the cash confirmation for the client, Simply Soups Inc., we obtained authorization from this client before we contact with appropriate third party. In order to receive necessary evidence, we get assistances from the third party during the confirmation process, which includes American North West Bank, BNY Federal, Fifth Federal Bank, and Sparkasse-Frankfurt. After communicating with these banks, we started first confirmation and along with all other confirmations respectively. The whole process is completed through third-party intermediary’s system, edu.confirmation.com, which provided a secure technological platform to transmit information between banks and us as well as to validate the authenticity of the respondent.

Use of Third-Party Intermediary:
There have been many cases where unauthorized individuals have altered confirmation responses to hide the company’s financial standing.

Due to this, the confirmation process has become of high risk. Third party intermediaries have been established to assist in this process by securely transmitting information to the bank and validating the authenticity of the respondent. The use of third-party intermediaries makes it more difficult for anyone to alter confirmation requests. There are risks that come with the use of third party intermediaries because the intermediary’s control weaknesses or deficiencies fall on the auditors as well when relying on confirmations received through them. Auditors must assess that the intermediary’s system of internal control has been designed and is operating effectively to meet the PCAOB

standard.

To comply with this standard and to gain comfort over such risk, third-party intermediaries hire an independent audit firm to examine and report on the effectiveness of its internal controls.

The hired firm then presents its findings in a Service Organization Controls (SOC) report, which allows the auditor to determine whether or not the intermediary’s controls can be relied upon. A SOC 3 Seal of Assurance was given to certify that the edu.confirmation.com website has been examined by an independent accountant. This report is based on management’s assertions that the entity’s business is in conformity with the applicable Trust Services Principles and Criteria. The principles that must be met in order to earn the Seal are security, availability, processing completeness, confidentiality and privacy. Certain criteria must be met also in order to display the Seal, which are the following: objectivity, measurability, completeness, and

relevance.

Conclusion:
From our work performed and evidence gathered from our third-party, edu.confirmation.com, we were able to determine that the cash balances matched the reported amount from our client. However, there were some exceptions when confirming the cash accounts. First, there was a note on the confirmation from American NorthWest Bank where Richard Johnson stated that Simply Soups Inc. had a line of credit. This requires us to further examine this account to conclude if there can be a risk for material misstatement. Secondly, Fifth Federal Bank’s confirmation noted that information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warrant, expressed or implied. Thirdly, we found that the balances did not match for Sparkasse-Frankfurt and therefore a second confirmation was required to make sure balances were accurate. We received the second confirmation where Helga Jones stated the numbers were transposed and the balances had been corrected.