Question

Smith, a young CPA and one of the audit team members for Darwin Electrical Appliances Ltd (Darwin), has developed very good insights into the company’s systems in the last 12 months and was asked by his partner, Chris, to draft a report on the reliability of the internal control at Darwin for review. The report is to be used as a part of a due diligence assurance engagement for Darwin’s prospectus. Darwin wants to be listed on the Australian Securities Exchange by next June.

In carrying out the review, Smith finds a number of matters that concern him. He notices that the controls over inventory requisitions are very poor, leading to numerous complaints from customers about delays and wrong deliveries, and cancellations. Moreover, the inventory records do not show the history or the values of the inventory, so that estimates were used to arrive at the year-end inventory. He also noticed the poor standard of the appliances, with manufacturers’ warranties long expired.

Smith completes his report, with details of the poor internal controls for his partner’s review. However, his partner replaces his report with a very brief summary, and a conclusion that the internal control systems are sound and reliable.

Smith makes an appointment to see Chris but is worried as to how he should approach him about Darwin Electrical Appliances’ issues.

REQUIRED

Discuss the professional and ethical issues faced by Smith and provide an analysis, which can help him deal with the matter with Chris.

Answer 1

Professional & Ethical Issues:

Smith is aware that there are control issues with the Darwin , which he has himself checked and concluded in report.

Preparing the report with honest and true findings , without any bias, Smith complied with his professional standards.

The issue now that he is faced are the following:

• The actual detailed report has been replaced with an abridged version.
• The abridged version distort the conclusion and facts around coontrols.
• The Parter is avoiding meeting with Smith
• If this abridged version is issued then the whole Darwin prspectus shall be based on misrepresnted facts.

Dealing with the situation:

If Smith is been constantly been avoided by Partner then the best way for Smith is to put his reservations and the real facts on mail to Chris.

In case there is no revert from Chris then a couple of soft reminders to be mailed , keeping the mail chain intact.

In case even post reminders there is no acknowledgement or response then a final reminder with a copy marked to next level to be sent.He can also then try to meet the Senior Partners and brief them on the facts and the ramifications of issuance of such incorrect report to client.

This way Smith shall ensure best intentions and efforts in protecting the client and as well his own Professional and Ethical standards.