Case 6-3 Richards & Co: Year-end Audit Engagement Paul Lewis is the quality revi

Question

Case 6-3 Richards & Co: Year-end Audit Engagement

Paul Lewis is the quality review partner on the Richards & Co. engagement. He was reviewing the workpapers prior to the December 31, 2015, annual audit when he came across transactions that caused him a great deal of concern. He wondered if the firm’s auditors had handled them properly. The following information appeared in a memo to the file that prompted his concern.

Memo to File: Supplier Credits for Returned Product

For the last three quarters of the year, Richards has engaged in last-minute transactions that are questionable. The facts are, according to the client, that Richards received credits from a cellular phone supplier and promised to repay the supplier by purchasing cellular telephone and repair services at inflated prices in the subsequent quarter. The client has been unable to produce any supporting documents with respect to the promised purchases, and we have not been able to trace any such payments to cash disbursements.

The client has produced credit memos in the amount of $10 million, $7 million, and $4 million for December 31, 2015, September 30, 2015, and June 30, 2015, respectively, which is about 15 percent of the reported net income for 2015. The memos are marked to indicate that the credit was being provided in connection with defective telephone components. However, we could not identify any shipping documents to confirm that the components were returned to the supplier.

The client assures us that the promised purchases will be made and the only reason for not doing so is a cash flow problem. We are relying on management’s representations in that regard. Richards is currently negotiating a loan for $20 million.We have filed 10-Q quarterly reports to the SEC based on the reported net income. We recommend, however, the firm conduct due diligence prior to publishing the 10-K annual report.

Question

Can someone explain to me what is going on in the case in simpler terms and what some of the ethical issues are? Thanks!

Explanation / Answer

Here the client is making various misappropriation of assets and liabilities. It is not as per the law . It is the responsibility of the reviewer to see and report to the proper authority. In case of review we give negative confirmation .

The reviewer at the time of review simply not rely upon the representations of the management. Here it is clearly knowing that there is misappropriation of funds. Here that should be disclosed in the report.

If the above findings are not disclosed then the reviewer is said to be guilty in conduct of his duties and has to face consequences.

Here even the due diligence is conducted for loan the reviewer must report about his findings. If he silent about findings during review the he is said to be guilty of misconduct.

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