Something Went Sour at Parmalat1. What steps does an auditor ordinarily take when confirming cash balances held on depositswith financial institutions?• Standard bank confirmation requests should be signed by a client officer. Banks usually will notrelease information without client permission.• Auditors should be very careful that the bank’s address is reliable and not subject to alterationby the client in such a way as to misdirect the confirmation.• The request should seek information the recipient can supply, like the amount of a balance.• The audit firm should control and mail the confirmations, not be given to client personnel formailing. Auditing standards requires direct communication.• Responses should be returned directly to the audit firm, not to the client.2. What additional steps should the auditors have taken when they received the smudged faxcopy printed on Bank of America letterhead?When receiving a questionable piece of evidence, the auditor should follow up immediately tocorroborate the evidence. In this case, the auditors should have followed up immediately bytelephone using a phone number obtained from a nonclient source (e.g., an internationaltelephone book or Internet Web site). The audit team should also have requested that, in additionto the faxed copy, the original confirmation be mailed directly to them. In terms of evidence, asigned original is preferable to a faxed confirmation for billions of dollars.

3. What red flags did the auditors miss?The auditors missed several red flags:1. The size and location of the cash account should have been a red flag. It is very unusual for alarge company to have so much cash in a (foreign) bank account.2. Between January 2000 and September 2003, Parmalat raised more than $5 billion in debtofferings. With so much cash available, why was Parmalat continuing to borrow money?3. The smudged fax verifying the balance was highly suspicious. Where was the original? Was itsent directly to the auditors?4. What steps should Deloitte & Touche SpA have taken with respect to Grant Thornton’s auditof the Cayman Island subsidiaries?This issue is a tricky one because the firm is dealing with another audit firm conducting asignificant part of the audit. However, when large balances make up a significant portion of acompany’s consolidated balance sheet (in this case, 38 percent of Parmalat’s assets were in thesubsidiary’s bank account), auditors should take additional care to obtain additionalcorroboration. They certainly should have visited the other auditors’ offices to examine theirworkpapers