Question

Major "Big 6" Certified Public Accounting firms have three sources of revenue or three divisions: Audit, tax, and Management Consulting. But the real power resides in the Audit Department because the Audit Partners earn between $100,000-750,000 per year. An annual audit of a large U.S. corporation can cost over $500,000 each year.

The Securities and Exchange Commission (SEC) of the federal government requires that all corporations selling stock on the New York Stock Exchange be audited annually by an independent national CPA firm. The Audit Partner in-charge of the engagement directs the staff auditors to keep audit workpapers for evidence in case of a law suit. These workpapers show that the corporation is or is not maintaining generally accepted accounting principles (GAAP).

During an audit in Hollywood, California a staff auditor was completing an audit of a home health care corporation. During the investigation it was noticed that some of the accounting records were missing. It was common knowledge that the prior corporate controller had embezzled hundreds of thousands of dollars from the corporation and had fled the United States. The staff auditor commented in the workpapers that the missing files could be due to the embezzlement. Upon reviewing the workpapers, the Audit Manager rebuked the staff auditor for mentioning the embezzlement in the workpapers.

Questions:

1          What are the issues involved here? Explain in your own words

2          Should the audit workpapers be re-done? Explain in your own words

3          What would you do? Explain in your own words

4          What are the short and long term consequences of not reporting the embezzlement in the workpapers? Explain in your own words

5          What are the legal ramifications of this case? Explain in your own words

6          Who is affected by the note in the papers: stockholders, employees, auditors, the community in general? Explain in your own words

Answer 1

Answer 1. The major issue involved in the question is about reporting the embezzlement. Other issues include unavailability of records, and disclosure of the same.

Answer 2 Yes, audit work papers need to be re-done. The main purpose of the audit is to check upon the organisation financial statements and verify its true and fair reporting. In this case if the issues are not reported then the very purpose of audit is not served.

Answer 3. If I would be engaged in the said Audit, I would surely report the facts.

Answer 4. In short term there may be mis-reporting of facts which may lead to a major fraud in long term. This can also result in to legal consequences to the company as well as auditors.

Answer 5. As per relevant acts the company may be liable to pay certain amount of fine.

Answer 6 The stockholders being the actual owners are largely affected by audit obervations. However it may also affect others depending up on its severity.

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