Description: Smith is the Chairman of Cardillo Travel Agency, he just involved into a case that whether to sign the affidavit with United Airlines. Because he inspected that there is something wrong with the affidavit concerning Cardillo’s stockholders’ equity, so that he refused to sign affidavit. Just for this reason, he was kicked out from his position. Moreover, the other two of his executives Rognlien and Lawrence, just approved the $203,000 adjusting entry recorded link to Airlines-Cardillo transaction.
Afterward, Helen Shepherd, an auditor of Touch Ross, found the mistake that the money cannot be recorded for the payment to Cardillo was refundable under certain conditions and thus not immediately as revenue, so she questioned Rognlien and Lawrence, but they still insisted the entry of the money has been properly recorded. And one year later, R and L just dismissed the Touch Ross accounting firm and hire KMG as their public accounting firm. After the turnover of KMG, they just founded this matter too, and resigned as the independent audit firm.
Q1: Accountants must notice the wrong do in confirmation of $203,000 as entry and proper recorded in Cardillo. They just face the dilemma of disclosing the wrong do in revenue or deceiving the outside auditor together with the executives. This kind of false activity directly influences the liquidity and then the profit of inventors and creditors of Cardillo may be affected.
The initial responsibility that accountants should do to both internal and external accounting information users is to do account by rules through serious accounting procedures and do not cook the books for the sake of their own profit or just dare to be sacked. And the fact is that the accountants in firm Cardillo are lack of responsibility and afraid of being dismissed.
Q2: The procedure includes reviewing monetary fund’s and paid-in capital project, the review of exchange funds, including accounts receivable, accounts payable, etc., and the review of main business income, as well as like inventory, prepaid expenses review. I think that the procedure that auditors use is effective but not comprehensive, they just reviewed accounts receivable item and some documents related to the transaction.
And I do think auditors have to inform Helen immediately, cause as the audit partner, Helen has right to be informed of the risk or fraud the Cardillo owned, and audit partner should get involved in the case and find out the mistake.
Q3: Shepherd scanned through the information in the client’s files regarding the agreement Rognlien had negotiated with United Airlines. And through the agreement, it suggested the United Airlines payment to Cardillo was refundable under some circumstance and thus not recognizable immediately as revenue. Valid audit evidence includes physical evidence, documentary evidence, oral evidence and circumstantial evidence. For this case, auditor here uses scanned through the files as documentary evidence and held a meeting with L as oral evidence.
Q4: The SEC just want to make sure if there has something wrong with the independent audit firm in the procedure of accounting, auditing and financial reporting issues that made Cardillo dissatisfied. And I do consider what Shepherd did in the 8-K statement is valid, cause the initial responsibility that auditors should do is to uncover the risk through serious auditing procedures. So, when he inspected he problem, he has responsibility to put it out on the SEC statement.
Q5: Yes I think, because the evaluation of integrity of some key executives must be done to double check the meaningfulness and validity of the auditing procedures. Auditors should make sure those people who are in the domain positions in a firm are reliable and then they can done the procedure soundly, or the report does not make any sense. Auditors can browse through some files; make a conversation with some of the subordinates of those executives, or through some observation to make sure the integrity of the key executives.