Case 2-39
a. The Caribbean country has strict laws forbidding the transfer of funds out of the country. The funds being smuggled out of the country can result in fines or the loss of Ultro, Ltd. Assets. This could be a big loss for Ultro as well as Enormo Corporation. The known fraud could result in the seizing of the entire company. The improper transfer of funds could also cause scrutiny of Enormo’s books to find out if there are other instances of fraud.
b. The CPA firm took the first step by discussing the matter with management. Their lack of concern warrants the firm going to a higher level of management if possible. The CPA personnel should analyze other transactions to detect other instances of fraud if any according to Sec QC 10.32a. This will help to determine if this is an isolated incident or a culture of fraud. The findings should then be discussed with other members of the audit team. If it is decided that the transactions indicate collusion the implications of the audit must be considered. The auditor may decide that the audit cannot be completed until the questionable transactions are corrected. The CPA firm may decide to withdraw from the client entirely. The level of misrepresentation may also warrant being reported to the proper authorities though a level of confidentiality is necessary. The documentation that was gathered to come to the conclusion that the financial statements are misrepresented should be submitted when reporting questionable transactions.
c. I believe the firm should withdraw from the audit of Enormo Corporation. The management team is aware of the misrepresentation that has been committed and sees nothing wrong with it. Enormo is the client and will not accept an adverse opinion. Keeping Enormo as a client would diminish the CPA firm’s representation if they do not disclose the improper transactions of the company. Enormo would probably not pay for the extra expense of a more extensive audit or for one not giving them a favorable opinion.