HALF FULL OR HALF EMPTY

As with many of his audit staff counterparts across the country, Bill Turner spent the last day of the year performing inventory observation procedures. His assignment that December 31 included taking test measurements at a client’s grain elevator in a small prairie community. Bill had measured grain invento-ries on two previous audits and was the in-charge accountant on this audit.

Bill’s observations of the quantity of grain in the elevator fell ten percent below the client’s records. Bill’s attention was drawn to the discrepancy in the two measurements of what was in the elevator because, in his judgment, such a gap was significant enough to be material. The resulting difference between the inventory as reported by the client and the audited amount was enough to cause a significant drop in net income. Bill documented his findings in the working papers and proposed an adjusting entry for the difference.

Upon delving further into the matter, Bill determined that a discrepancy in the grain inventory had also surfaced two months previously. The quantity of grain, as reported by a government inspector at that time was also lower than that on the client’s records. The difference in the inventory valuation, however, was not as great as that in Bill’s tests. Still, no adjustment to the client’s records was made. This information was also documented in the working papers.

Prior to discussing the discrepancy with the client, Bill told Greg, the en-gagement partner, about the problem. Greg, who had substantial experience in the industry, advised Bill that this would be a sensitive issue with the client. He also pointed out that grain inventories are notoriously difficult to measure, with the potential for errors as large as ten percent. Greg promised that he would handle the matter personally and therefore told Bill not to discuss the discrep-ancy with the client. The partner kept the inventory working papers.

After completion of the field work, Bill returned to the office to wrap up his work on the engagement. The inventory working papers were still not in the file. Upon Bill’s inquiry, the partner handed him a new set of working papers. These working papers, which had been dated as of the audit date, had been signed off by Greg and substantiated the book amount. Bill’s subsequent questioning of the partner revealed that Greg had personally performed additional work on the grain inventory after the client’s year end. Based on his own evidence gathering, the partner had substituted his own working papers for the documentation that Bill had prepared. No evidence remained of Bill’s proposed adjustments. An unqualified opinion was subsequently issued.

What are the ethical issues?
What should Bill do?

Ethical issues
Bill recognized the client had higher amount of inventory in their financial statement then actual. Bill identified that this incorrect balance will lower a significant amount of net income on the financial statement. He found out the company may attend this practice purposely because the government inspector had found out this issue two month ago but no adjustment made. This behavior is not ethical because the company produce a misleading financial statement that would affect outside user’s judgement and a potential of paying lower income tax.
The second ethical issue is Greg hide Bill’s observation in their report. This is an ethical issue because Bill’s observation will change the client’s income statement once he reveals this mistake. If Greg’s action is done, the client will benefit from this lower income on financial statement and the outside user of financial statement may have incorrect judgement based on the misleading financial statement. Greg’s practice violated the accountant regulation of faithful representation.
Unfaithful representation
-fell ten percent below the client’s records
- cause a significant drop in net income
- documented his findings in the working papers and proposed an adjusting entry for the difference.
- also documented in the working papers
- Greg promised that he would handle the matter personally and therefore told Bill not to discuss the discrep-ancy with the client.
- Based on his own evidence gathering, the partner had substituted his own working papers for the documentation that Bill had prepared.
Potential of
What should Bill do
The accountant should serve public interest. And integrity and honesty of material.
There are several points is not ethical. The client’s book inventory is over 10 percent more than the actual both at the year end and when the government inspector come. This is clearly evident the client doesn’t faithfully present their inventory.
When Bill record all the evidence, although the evidence may not affect the result opinion, it still need to be kept in the report.
Ø The audit opinion also implies that there is adequate disclosure of all the important accounting information users need.
A process of reducing information risk to users of F/S
The most major issue that offended the ethic is Greg hide the truth. Greg’s advice of not reveal the inventory finding disobey the ethic of reavling truth. Greg then did additional work to hide Bill’s all finding create misleading report of the truth. These action clearly disobey the truth and accountant ethic.
Bill need to reveal the truth to public and client. The best way he can do is to seek legal counsel.