: Enormo Corporation is a large multinational audit client of your CIA firm. One

Question

: Enormo Corporation is a large multinational audit client of your CIA firm. One of Enormo’s subsidiaries, Ultro, Ltd., is a successful electronics assembly company that operates in a small Caribbean country. The country in which Ultro operates has very strict laws governing the transfer of funds to other countries. Violations of these laws may result in fines or the expropriation of the assets of the company. During the current year, you discover that $50,000 worth of foreign currency was smuggled out of the Caribbean country by one of Ultro’ s employees and deposited in once of Enormo’s bank account. Ultro’s management generated the funds by selling company automobiles, which were fully depreciated on Ultro’s books, to company employees. You are concerned about this illegal act committed by Ultro’s management and decide to discuss the matter with Enormo’s management and the company’s legal counsel. Enormo’s management and board of directors seemed to be unconcerned with the matter and expressed the opinion that you were making far too much of a situation involving an immaterial dollar amount. They also believe that it is unnecessary to take any steps to prevent Ultro’s management from engaging in illegal activities in the future. Enormo’s legal counsel indicated that the probability was remote that such an illegal act would ever be discovered, and that if discovery occurred, it would probably results in a fine that would not be material to the client’s consolidated financial statements. Your CIA firm is ready to issue its opinion on Enormo’s consolidated financial statement for the current year; you are trying to decide on the appropriate course of action regarding the illegal act. Required: a. Discuss the implications of this illegal act by Ultro’s management. b. Describe the course of action that are available to your CIA firm regarding this matter. c. State your opinion as to the course of action that is appropriate. Explain

Explanation / Answer

disclaimer: The answer is given based on my knowledge on indian accountancy standards.

A. The implications of illegal act done by Ultro management according to the management is that the company it would result only in fine. The conclusion can be drawn fron this the internal controls of the company are weak. Fine, even though a small amount for the company it is material and it requires that the shareholders should know about such acts being done inthe company.

2. To CIA firm the course of action is to check and perform more audit procedures as the act may be not single and more of such can be found. The internal controls of the company are weak so company cannot rely on the controls and perform detailed check. it has to specifically mention the point so that the shareholders of the company know and take decision.

3. As per opinion it is required to be mentioned in its audit report.

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