Audit accounting

After reading Chapter 4 of your Forensic Accounting and Fraud Examination textbook, complete the following problems, which will help you apply your knowledge of the auditing environment:

· Case 56 on page 126.

· Case 57 on page 126.

· Case 59 on page 127.

56. Remco Gourmet Water Company produces and distributes bottled water in a variety of natural flavors. Jan Cancel, a partner in a local CPA firm, is conducting the first-time-ever audit of Remco. On the second day of her audit, she discovers that the CEO has acquired a large-screen television, a speed boat, and a Jacuzzi for his personal use. All three items were delivered to the CEO's personal residence, and they were booked into the accounting records as consulting expenses. Jan examined Remco's most recent federal tax return and noticed that the items had been included in deductible consulting expenses.

a. What should Jan Cancel do about her finding?

b. What impact should the finding have on how she proceeds with the audit?

c. What impact should the finding have on her audit opinion report?

57. John Rella is a long-time auditor of a medium-size public accounting firm that serves clients in the Miami area. He is auditing Green Market Vitamin Company for the fourth year in a row, but this year Green Market has a new CEO, who has an unusual style of doing business.

Margarat Boracha, the new CEO, likes to drink and party, and she insists that top employees and business associates drink and party with her. On the first day of the audit, she invites John to meet with her on her private yacht where she has her second office. He thinks nothing of it because he has met with clients on corporate yachts before.

When John arrives at the yacht, he is in for a big surprise. Margarat is sitting outside on the rear deck in a skimpy bikini, talking with two men in Spanish. She tries to introduce John to the men, but neither of them speaks English. John studied Spanish in college, but he does not try to speak to them in Spanish for fear of showing his weak command of the language.

A minute later a man appearing to be the captain (because of his white navy-style clothes) calls Margarat to the front of the boat, leaving John alone with the two men. The two begin a heated conversation, but John simply stares out over the water, not letting on that he understands.

John listens as one of the men begins to describe what sounds like a small airplane arriving from Cartagena. They speak in somewhat coded language, but it does not take him long to figure out that they are speaking about a shipment of cocaine.

The men leave as soon as Margarat returns. She then sits down with John and begins speaking about her company. She drinks a lot but does not push John to do the same. After a while, John finds she is not only charming but very knowledgeable about business, and he becomes convinced that she is a good leader and probably an effective CEO for Green Market Vitamin Company.

John leaves the meeting with mixed feelings. On one hand, he would like to retain the engagement because Green Market has been a profitable client in past years and, under Margarat's leadership, will probably add an extra six figures to his personal annual income. On the other hand, he is worried about getting mixed up with someone affiliated with drug dealers.

a. How should John handle the situation?

b. Should he confront Margarat with his concerns?

c. Should John go to the police?

59.Sam Johnson is a new partner in Wilkerson, James, and Flores, an accounting firm. He is in charge of an audit for Zappo Electronics, which manufactures circuit board parts for major international electronics companies.

Zappo's main asset is its inventory, which is listed on the books at $742,000. After doing a complete audit of the inventory, however, Sam discovered that nearly half of it is obsolete and worthless. He reported to the senior partner that the inventory needs to be written down by $350,000 before the firm could sign off on a clean opinion.

The senior partner meets with Zappo's CEO, who argues strongly against any write-down of inventories.

“We'll find a market for every last item in the inventory,” said the CEO. “It might take some time, but we'll sell everything.”

The senior partner tried to disagree, but the CEO was adamant. “If you make us write down the inventory that much, we won't be able to get any more bank loans, and that will put us out of business.”

The senior partner and the CEO haggled back and forth until they finally agreed to a $125,000 write-down.

“That will keep our credit intact,” said the CEO.

The next day, Sam met with the senior partner.

“We've agreed to a $125,000 write-down,” said the senior partner to Sam. “The company has already made the adjustment, and now I want you to sign the audit report without any qualifications or modifications. This is a good client, and I'm not going to let us lose it over something stupid like this.”

Sam objected. His analysis of the inventory was solid, and he did not understand how an honest auditor could simply negotiate a write-off.

“Forget about it,” said the senior partner. “The company is financially sound, so what does it matter? Where's our liability? We don't have to worry about getting sued unless the company fails, and you know it isn't going to fail. It's overflowing with military contracts. I wish I owned part of the company myself.”

“But that's not how we're supposed to do auditing,” said Sam.

“Look,” said the senior partner, “Who's to say for sure what that inventory is worth? Just forget about it. Besides, we can get it to do more write-offs next year. If I listened to you, there would be no next year; the company would be cut off from its creditors and out of business.”

a. Do you agree with Sam or the senior partner?

b. Defend your position.

c. Should auditors consider the impact of their opinions on clients? A negative opinion can sometimes destroy a company.