Enormo Corporation is a large multinational audit client of your CPA firm. One o
ID: 2593149 • Letter: E
Question
Enormo Corporation is a large multinational audit client of your CPA 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 one of Enormo's bank accounts. 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. However, Enormo's management and board of directors seem to be unconcerned with the matter and express the opinion that you are 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 indicates that the probability is remote that such an illegal act would ever be discovered, and that if discovery were to occur, it would probably result in a fine that would not be material to the client's consolidated financial statements.
Your CPA firm is ready to issue the integrated audit report on Enormo's financial statements and internal control for the current year, and you are trying to decide on the appropriate course of action regarding the illegal act.
Discuss the implications of this illegal act by U1tro's management.
Describe the courses of action that are available to your CPA firm regarding this matter.
State your opinion as to the course of action that is appropriate. Explain.
Explanation / Answer
Step 1 : Implications of this illegal act by Ultro's management.
When auditors find illegal acts committed by a public company client, they need to consider three major factors. First, the auditor need to cosider the impact on the client's financial statements, which includes the possibility of fines and business losses. To comply with Generally Accepted Accounting Principles (GAAP), the financial statements show the material effects of illegal acts. Secondly illegal acts may change an auditor's view about the integrity of the management. In addition to that, auditors also begin to reflect on whether to continue to serve the same client when such instances of illegal acts have been uncovered. Finally, the auditors consider whether the illegal act show poor internal control over financial reporting.
Step 2 : The courses of action available to CPA firm.
Step 3 : Opinion as to appropriate course of action.
In my opinion, The CPA firm should evaluate the adequacy of disclosure in the financial statements of the potential effects of the illegal acts by the Ultro's management. The CPA firm should first discuss with the company's management about disclosure in the financial statements, if the management of the company not agree with the auditor, then auditor should report this matter in his integrated Audit report so that users of the financial statements should came to know about this fact.
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