Question

A significant part of the audit entailed verifying the physical count, cost, and summarization of inventory. Inventory was highly significant to the financial statements, and Yost knew the inventory was pledged as collateral for a large loan to First City National Bank. In reviewing Stuart's inventory count procedures, Yost told the president she believed the method of counting inventory at various locations on different days was highly undesirable. The president stated that it was impractical to count all inventory on the same day because of personnel shortages and customer preference. After considerable discussion, Yost agreed to permit the practice if the president signed a statement that no other method was practical. The CPA firm had at least one person at each site to audit the inventory count procedures and actual count. There were more than 40 locations.

Eighteen months later, Yost found out that the worst had happened. Management below the president's level had conspired to materially overstate inventory as a means of covering up obsolete inventory and inventory losses resulting from mismanagement. The misstatement occurred by physically transporting inventory at night to other locations after it had been counted in a given location. The accounting records were inadequate to uncover these illegal transfers.

Both Stuart Supply Company and First City National Bank sued Lauren Yost & Co.

2: Requirements

Answer the following questions, setting forth reasons for any conclusions stated:

a. What defense should Lauren Yost & Co. use in the suit by Stuart?

b. What defense should Lauren Yost & Co. use in the suit by First City National Bank?

c. Is Yost likely to be successful in her defenses?

d. Would the issues or outcome be significantly different if the suit was brought under the Securities Exchange Act of 1934?

Answer 1

Based on the details of events and records,

a) in defense against suit by stuart, Lauren Yost & Co. should say that they have verified the stocks at all 40 locations and can show the Inventory statements signed as well as can also put forward the signed statement from President when she had pointed out about the Inventory management procedure and the way of accouting records were maintained.

b) in defence against suit by First City National Bank, Lauren & Co. should /can argue the same as did against Stuart. they can produce the signed documents by Stock management Team and the president.

c) Yost may be succesfull in her defenses as the maintainance of accounting records and management of Inventories are the liability of the company's management. Onus of transparency and accountability lies on the organisation and Auditors responsibility is to exploring the faults in systems and mentioning them in their reports that they did.

d) issues or outconme would be same if the suit was brought under the securities Exchange act of 1934.