Question

Topic:   Revenue & Misrepresentation by Clients

Characters: Rachel Hanson, Senior in CPA firm

Jim Thompson, Owner/manager of Fashion Line

Sharon, part-time bookkeeper of Fashion Line

In addition to the usual mix of compilation, review and audit clients for which Rachel Hunt

serves as a senior in a small office of a regional CPA firm, she has been assigned a new

client that recently engaged the firm. Fashion Line, an incorporated retail outlet, is a thriving

local store. The business is run by a single owner/manager, Jim Thompson, who makes

all major decisions. The business has not previously used the services of a CPA firm. In

addition to preparation of financial statements, the CPA firm will handle tax returns for the

business.

At her Line visit to the client’s office, Rachel is introduced to Sharon, the part-time

bookkeeper who is also a full-time accounting student at the local university. At a

subsequent meeting, Sharon confides to Rachel that she found the job at the beginning of the

semester after an extensive search. Sharon really needs the money to help finance her

education, and feels lucky to have found a good-paying job during the current economic

downturn. Feeling that Rachel is someone she can talk to and get advice from, Sharon

describes a situation that has been on her mind for some time now.

Sharon’s concern relates to the handling of sales revenues. When monies from sales revenues

are counted and deposited on a weekly basis, a chart is filled out with categories carefully

delineating the type of payment: cash, checks, American Express, or Visa/Mastercard.

Sharon’s employer, after depositing the weekly total, brings this chart back with his own

written-in total of the actual amount deposited.

After looking over some of these weekly deposit chats, Sharon noticed that $500 cash was

missing from each deposit. After a more thorough inspection of monthly tax documents that

Jim Thompson has filled out, Sharon noticed that the reported monthly gross revenue was

$2,000 less than what had been actually counted.

The employer is the only person handling the money after it has been counted. He is also the

only one to deposit the money. When Sharon asked Mr. Thompson about revenue not being

reported for tax purposes, he assured her that every dollar of income was reported on the tax

forms. Furthermore, Jim asserted, since Sharon wasn’t the person who signed the forms,

she shouldn’t be concerned.

1) What is the situation and the accounting issue(s)

2) Describe at least one ethical principle from the AICPA Code of Conduct and at least one accounting code rule (e.g.

independence, integrity, confidentiality, acts discreditable, etc.) that should be considered when analyzing the case?

3) What are your recommendations for the people involved?

Answer 1

1.relates to the handling of sales revenues and Not reporting of revenue and taxes correctly

After looking over some of these weekly deposit chats, Sharon noticed that $500 cash was

missing from each deposit. After a more thorough inspection of monthly tax documents that

Jim Thompson has filled out, Sharon noticed that the reported monthly gross revenue was

$2,000 less than what had been actually counted.

The employer is the only person handling the money after it has been counted. He is also the

only one to deposit the money. When Sharon asked Mr. Thompson about revenue not being

reported for tax purposes, he assured her that every dollar of income was reported on the tax

forms. Furthermore, Jim asserted, since Sharon wasn’t the person who signed the forms,

she shouldn’t be concerned.

2.

AICPA members are bound by the AICPA Code of Professional Conduct. Rule 201 requires that members provide professional services with competency. In the delivery of personal financial planning services, a member shall adhere to the following Principles of Professional Conduct.

ET Section 52 – Article I – Responsibilities
In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.

Section ET 53 – Article II – The Public Interest
Members should accept the obligation to act in a way that will serve the public interest, honor the public trust and demonstrate commitment to professionalism.

Section ET 54 – Article III - Integrity
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

Section ET 55 – Article IV – Objectivity and Independence
A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.

Section ET 56 – Article V – Due Care
A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.

Accounting rules are statements that establishes guidance on how to record transactions. As per accounting rules all the accounting transactions should be recorded in the books of entity using double entry accounting method. Double entry accounting method means for each transaction two (or more) accounts are involved, one account shall be debited and the other account shall be credited with the same amount.

For example: If a person purchases an asset on credit for Rs. 10,000, then the accounting shall be done by crediting cash and debiting asset account simultaneously with an amount of Rs. 10,000.

Personal Account:

The rule related to Personal account states debit the receiver and credit the giver. In other words, if a person receives something, receiver’s account shall be debited and if a person gives something, giver’s account shall be credited.

For example, if Mr. X receives cash of Rs. 10,000 from Mr. Y then in the books of Mr. Y, Mr. X will be receiver so account of Mr. X will be debited with an amount of Rs. 10,000.

Real Account:

The rule related to real account states debit what comes in, credit what goes out. In other words, if something comes into business, it shall be debited and if something goes out of business, it shall be credited.

For example: An asset purchased for cash would be accounted as per rules of real account wherein asset is what came into business, so asset account will be debited and cash is something that got out of business, so cash account will be credited.

Nominal Account:

The rule related to nominal account states that debit all expenses and losses, credit all incomes and gains. In other words, if any expense or loss is incurred for the business, expense or loss account shall be debited and if any income or gain is earned in business, income account or gain/profit account shall be credited.

For example: If salaries are paid to employees then salary is an expense and hence salary account shall be debited. Likewise any rent received shall be credited to rent account as it is come.

3. Recommondations to people involved is which is as follows they need to follow the accounting rules and verify the completeness and correctness of the reveue and tax figures and apply golden rules of accounting to recongine the revenue and accounting