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Case 2 6 cbi holding company inc

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Case 2.6 CBI Holding Company, Inc. 134 CASE 2.6 CBI HOLDING COMPANY, INC. Synopsis Ernst & Young audited the pharmaceutical wholesaler CBI Holding Company, Inc., in the early 1990s. In 1991, Robert Castello, CBI’s owner and chief executive, sold a 48% stake in his company to TCW, an investment firm. The purchase agreement between Castello and TCW identified certain “control-triggering” events. If one such event occurred, TCW had the right to take control of CBI. In CBI’s fiscal 1992 and 1993, Castello orchestrated a fraudulent scheme that embellished the company’s reported financial condition and operating results. The scheme resulted in Castello receiving bonuses for 1992 and 1993 to which he was not entitled. A major feature of the fraud involved the understatement of CBI’s year-end accounts payable. Castello and several of his subordinates took steps to conceal the fraud from CBI’s Ernst & Young auditors and from TCW (two of CBI’s directors were TCW officials). Concealing the fraud was “necessary” to ensure that Castello did not have to forfeit his bonuses. Likewise, the fraud had to be concealed because it qualified as a “control-triggering” event. This case examines the audit procedures that Ernst & Young applied to CBI’s year-end accounts payable for fiscal 1992 and 1993. The principal audit test that Ernst & Young used in auditing CBI’s accounts payable was a search for unrecorded liabilities. Although Ernst & Young auditors discovered un ...
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