Katy Chilton

Danle Case 08-9

Case 08-9 Fraud and Illegal Acts

We have been hired to perform an audit of Jersey Johnnie’s Surfboards Inc. (the “Company”), which is an SEC registrant. Before completing the December 31, 2005, audit of the Company, Harry Hodad, the engagement partner, received a call from Tom Tube, the Company’s director of ethics and compliance. Mr. Tube said that the Company’s outside service provider that receives calls to the Company’s ethics and compliance hotline had informed him directly that the hotline had received a call alleging certain accounting improprieties as well as concerns about management’s overall commitment to accurate financial reporting. The transcript of the call was provided to the engagement partner and is included as Attachment I.

Required:

What steps should management, the Board of Directors, or the Audit Committee of the Board of Directors take in response to allegations of possible fraud or illegal acts?
The steps that management, the Board of Directors, or the audit Committee of the Board of Directors should take in response to allegations of possible fraud or illegal acts are that they should pay extra attention to transactions, accounts, issues, or situations that could indicate fraudulent behavior or illegal acts. When they are more aware of information that could lead to a fraud discoveries or illegal acts they should determine if fraud or illegal acts are possible. The next step is to see if possible fraud and illegal acts might materially affect the company. Then, they should develop a plan to test more controls and investigate further into any tips received on the company’s fraud hotline. Finally, they should determine what effects that this has on their audit.

What steps should the audit engagement team take in response to allegations of possible fraud or illegal acts?
According to the U.S.