Question

Enormo Corporation is a large multinational audit client of your CPA firm. One of Enormo’s subsidiaries, Ultro, Ltd., is a successful electronics assembly company that operates in a small Caribbean country. The country in which Ultro operates has very strict laws governing the transfer of funds to other countries. Violations of these laws may result in fines or the expropriation of the assets of the company. During the current year, you discover that $50,000 worth of foreign currency was smuggled out of the Caribbean country by one of Ultro’s employees and deposited in one of Enormo’s bank accounts. Ultro’s management generated the funds by selling company automobiles, which were fully depreciated on Ultro’s books, to company employees. You are concerned about this illegal act committed by Ultro’s management and decide to discuss the matter with Enormo’s management and the company’s legal counsel. However, Enormo’s management and board of directors seem to be unconcerned with the matter and express the opinion that you are making far too much of a situation involving an immaterial dollar amount. They also believe that it is unnecessary to take any steps to prevent Ultro’s management from engaging in illegal activities in the future. Enormo’s legal counsel indicates that the probability is remote that such an illegal act would ever be discovered, and that if discovery were to occur, it would probably result in a fine that would not be material to the client’s consolidated financial statements. Your CPA firm is ready to issue the integrated audit report on Enormo’s financial statements and internal control for the current year, and you are trying to decide on the appropriate course of action regarding the illegal act.

a. Discuss the implications of this illegal act by Ultro’s management.

b. Describe the courses of action that are available to your CPA firm regarding this matter.

c. State your opinion as to the course of action that is appropriate. Explain.

Answer 1

1. The implications of the illegal act of smuggling the foreign currency out of the Caribbean country by Ultro's management is that if the act was caught, the company would be fined heavily by Caribbean country. Because the act was not caught so the company can have one excuse, but Enormo's management and board of directors should not be unconcerned with the matter and must worn the Ultro's management not to repeat any such act in the future.

2. The courses of action that are available to your CPA firm regarding this illgal matter is that they may take the matter under the default amounts being lower to the percentage to report. In this way, CPA firm is not compled to take the matter in the audit report.

3.. In our opinion, the above CPA firm action is appropriate one. This is because the matter is detected at the company's end and not by the Country's authority, so the Company can be given one excuse by CPA firm. The company has to take strict action against the Ultro's management to not to repeat such illegal acts in future