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07 - Acc653 Assignment One Wk2
07 - Acc653 Assignment One Wk2
ASSIGNMENT ONE
BACKGROUND INFORMATION
Findings Two items that came to his attention during the audit concern
Fabian: There is a material dollar amount of inventory of part number
A2 that is still carried on the Paper Line books, despite the fact that the
Fast-tac machining component in which part A2 was used is now
considered first generation and is no longer manufactured. Company
policy requires an immediate write-off of all obsolete inventory items.
Some accounts receivable still carried as collectible were over 180 days
old. All receivables are due in 30 days, which is standard for the
industry. Fabian believes that many of these old accounts are
uncollectible.
Fabian continued his audit, drafted his report containing findings related
to the inventory and receivables, and reviewed the draft report with the
division manager, Allyson Barrett. Allyson was visibly disturbed. “Gee,
Fabian, this couldn’t have come at a more awkward time. Our figures
just got audited by the external auditors — there was a guy out here for
our inventory count in November and Brenda sent her aging of the year-
end receivables to corporate headquarters. No one up there, in our group
or on the external audit team, was the least bit critical. If you go raising
problems particularly now, the external auditors will catch us writing
off inventory and receivables. They’ll adjust profit and there will be
hell to pay, for all of us. And, Fabian, this is no clear-cut issue, either. I
mean, I
Camilo Toro-Ramirez Feb 15, 2021
ACC653 N1A Auditing II
can see how you can write a report calling for clearer policy, but never
one calling for specific write-downs. That’s way out of your
jurisdiction. But still, I promise, we’ll look at all this after our
statements are accepted. Right now, I feel the managers of this
division have worked their hearts out and I intend to fight to protect
what little bonuses they have coming. If we write down as you
suggest, those bonuses will go and the stockholders will lose too.
Earnings per share will drop like a rock. They might even close this
division. Now you don’t want that, do you?” “Well, Allyson, I could
word my findings as they are in the draft but include your
response….” Allyson was suddenly angry. “What? And let the audit
committee decide the issue? They have nothing to do with this. They
accepted the external auditors’ report. If you want to make the audit
committee happy, you’ll accept it too and leave this adjustment stuff
alone.”
The internal audit director Concerned, Fabian delayed finalizing his
report and discussed the draft with John Wong, director of internal
audit. John was not trained as an auditor and was promoted to director
of internal audit from the treasury division of corporate finance so
that she might develop a better understanding of operating
relationships. Still, John is very smart and Fabian has always
respected him opinion. The discussion was by telephone, with Fabian
still at the Paper Line Division headquarters and John at the corporate
office. “Fabian, Allyson is right. If you blow the whistle on
management bonuses this year, we can forget all the goodwill that
I’ve been struggling to build for our department. It will all go out the
window.” Fabian responded, “I know you’ve been trying to put us on
a better footing with management, John, but Allyson is intractable. As
far as she is concerned, the only finding he will accept in the report is
that of deficient policy, with nothing mentioned about the inventory
or receivables needing adjusting.” “Well, do what you have to do,”
John ended the discussion. “But I insist that you submit a report that
Allyson agrees to and has signed. I don’t want to upset anyone, then
have to try to explain my report to the board when everyone is
complaining about the effect on the results and the bonuses.”
Camilo Toro-Ramirez Feb 15, 2021
ACC653 N1A Auditing II
Required
Assume the role of Fabian. Prepare a report, identifying and analyzing
the following:
a. What are the ethical issues involved?
b. What are the identified control weaknesses?
c. What are the possible courses of action?
d. What is your recommendation?
Camilo Toro-Ramirez Feb 15, 2021
ACC653 N1A Auditing II
REPORT
Date: Feb 15, 2021
To: Audit Committee, Flow, Division of Paper
RE: Internal Audit Of Manufacturing Inventory
I, Fabian Ming, have been tasked with the internal audit of the
manufacturing inventory of the Division of Paper in Flow.
Although the inventory was already reviewed by the external auditors,
and they have not had any issues with it, there are potential issues
with not writing down the obsolete inventory and aged receivables
that are uncollectible. The issues here have been raised to
management who have pointed out a lack in specificity in clear
company and accounting policy towards these two items.
Management has, however, refused to investigate and correct the
errors in the findings until after the next fiscal year after the books are
closed due to potential issues with he external auditors and until
bonuses are issued as the corrections can impair the bonuses for this
year.