Question -

Yves Laurent has just been put in charge of the BeautyNatural Inc. audit.  BeautyNatural is a small, but growing retail chain of natural cosmetics stores. BeautyNatural needs to borrow from the bank to finance its growth, and the bank has asked to see BeautyNatural's audited financial statements before it will increase the loan. This is the first year BeautyNatural has been audited.

Because this is his first audit as a senior, Yves was determined to bring the job in on budget.  He felt that this task would be made easier by the fact he would receive excellent co-operation from the client as his sister-in-low was the accounting manager at Beauty Natural. Yves has been assigned two inexperienced staff assistants for the audit. To save time, Yvese gave the assistants the audit plan for Health Drug Stores (Health), another audit he worked on. He told his staff that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business because "my time is billed out at such a high rate, we'll go right over budget." He did call them once a day from another audit on which he was working. The assistants told Yves that the audit programs did not always match up with what they found at Beauty Natural. Yves responded, "Just delete whatever is not relevant in the audit program, but don't add anything-it will only make us go over the budget."

On the last day the staff assistants were scheduled to be at the BeautyNatural's offices, Yves came out to review their work. One assistant told Yves she was concerned that they had not attended the inventory counts at any of Beauty Natural's out-of-town locations. The Health audit program stated that inventory should be observed for in-town stores only, because Health had only one small store out of town. For BeautyNatural three of their five stores are in other cities, including its largest store. In addition, internal control at Health was assessed by the auditors and found to be very effective. For the BeautyNatural audit, the staff assistants asked the warehouse manager about the controls over inventory and he told them "BeautyNatural is as strong a company as Health Drugs, in every way." The assistants assumed that internal controls were also effective at BeautyNatural based on this evidence.

When he heard about the additional stores, Yves told the assistants to get inventory listing sheets from the client for their inventory counts at the out-of-town stores. He told them, "Before you leave here today, make sure that the inventory balance in  BeautyNatural's general ledger agrees with the total for all their inventory sheets." The next day the staff brought their working papers in to Yves in his office at the audit firm. Yves reviewed the working papers, and recorded his conclusion that "the financial statements are fairly stated."  He submitted the completed working papers to his manager for review.

Required:

Describe which generally accepted auditing standards (GAAS) have been violated.  Using case facts, support your conclusion.

Arrange your answer in the table below  and on the next page: