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In: Accounting

VI.   CASE STUDY NO. 3 WELCO COMPANY During the audit of Welco Company, the auditor noted...

VI.   CASE STUDY NO. 3 WELCO COMPANY

During the audit of Welco Company, the auditor noted in vouching items in Travel Expense that a receipt for $750 for the dinner of a salesman with a prospective customer seemed excessive. Upon closely examining the receipt, it seemed like a 1 had been changed to a 7-Changing the receipt from $150 t $750. Upon examining other items; two other dinner bills appeared to have been altered similarly. Yet, the auditor decided that at most a few thousand dollars were involved for a multi-billion dollar company­ the amount was clearly not material. Since the risk of material fraud appeared remote, no additional work was done.

1.   What is the auditor's obligation, if any, to communicate this matter under SAS No. 99?


2.   . Assuming that the individual involved was the senior vice president of sales, what is the auditor's obligation, if any, to communicate the matter under SAS No. 99?

Solutions

Expert Solution

1.  SAS no. 99 says, “Whenever you have determined that there is evidence that a fraud may exist, that matter should be brought to the attention of the proper level of management. This is appropriate even if the matter might be considered inconsequential, such as a minor defalcation by an employee at a low level in the entity’s organization.” Thus, the threshold for communication is “evidence that a fraud may exist.” The small presence of a fraud risk factor or some other condition that has been observed when fraud is present generally does not meet this threshold.

2. SAS no. 99 describes how to respond when a misstatement is determined, or may be, the result of fraud. If you believe such a misstatement exists, but its effect is not material to the financial statements, you still are required to evaluate the implications of your belief, especially those dealing with the organizational person(s) involved.

In those instances where the misstatement is or may be the result of fraud, and the effect either is material or cannot be determined, following steps is required to be taken:

a)Attempt to obtain additional evidence.

b)Consider the implications for other aspects of the audit.

c)Discuss the matter and the approach for further investigation with an appropriate level of management that is at least one level above those involved and with senior management and the audit committee.

d)If appropriate, suggest the client consult with legal counsel.

SAS no. 99 provides guidance on the auditor’s course of action when the risk of material misstatement due to fraud is such that he or she is considering withdrawing from the engagement. It is impossible to definitively describe when withdrawal is appropriate, but in any event you probably will want to consult with your legal counsel.


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