In a letter to the audit committee of the Cline Wholesale Company, Jerry Schwart

Question

In a letter to the audit committee of the Cline Wholesale Company, Jerry Schwartz, CPA, informed them of material weaknesses in the control of inventory. In a separate letter to senior management, he elaborated on how the material weaknesses could result in a significant misstatement of inventory by the failure to recognize the existence of obsolete items. In addition, Schwartz made specific recommendations in the management letter on how to improve internal control and save clerical time by installing a computer system for the company’s perpetual records. Management accepted the recommendations and installed the system under Schwartz’s direction. For several months, the system worked beautifully, but unforeseen problems developed when a master file was erased. The cost of reproducing and processing the inventory records to correct the error was significant, and management decided to scrap the entire project. The company sued Schwartz for failure to use adequate professional judgment in making the recommendations.

a. What is Schwartz’s legal and professional responsibility in the issuance of management letters?

b. Discuss the major considerations that will determine whether he is liable in this situation.

Explanation / Answer

a) Schwartz'slegal and professional responsibility in the issuance of mamagement letters is to the extenf of using recommendations which are sound. Recommendations should be based on professional interpretation of the audit evidence accumulated and should not omit any information which are of seruius nature, relating to systemes deficiency . therefore he must follow due cate in management letters and management services in the same manner as required.

b) There are various factors whcih should be looked before deciding about his liability . first we need to determine whether the said system was properly installed as per the instructions issued by the Schartz , was there some deviation also wheter they could be forseen the possibility if erased master file. Also we should see whether the Schartz's carried out due care and deligence in designing the system as per client need

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