CPA Audit Quality

In response to a congressional request, GAO reviewed certain aspects of a certified public accountant's (CPA) audits of a government contractor subsidiary's consolidated financial statements to determine whether the CPA firm: (1) considered government audit findings on the subsidiary from 1982 through 1985; and (2) audited the subsidiary's inventory and inventory control systems. GAO also provided information on the circumstances surrounding the subsidiary's hiring of two of the CPA firm's former staff who audited the subsidiary.

GAO found that the CPA firm: (1) was aware of and considered the major problems found during government audits of the subsidiary; (2) adequately and properly evaluated the subsidiary's accounting and internal control problems to justify its findings that the subsidiary did not inflate its profits; (3) verified data that the subsidiary used to compute rates on military contracts, reviewed major contracts and contract modifications, and calculated estimated profits; (4) reasonably concluded that the progress payment reductions would have a negligible financial impact on the parent company, based on the subsidiary's action to improve its accounting system; and (5) did not allow its two former employees to participate in any work during the audit of the subsidiary.