#1. 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.
1. Discuss the implications of this illegal act by U1tro’s management.
2. Describe the courses of action that are available to your CPA firm regarding this matter.
3. State your opinion as to the course of action that is appropriate. Explain.
#2. You have been asked by the board of trustees of a local church to review its accounting procedures. As part of this review you have prepared the following comments relating to the collections made at weekly services and record keeping for members’ pledges and contributions:
The church’s board of trustees has delegated responsibility for financial management and the financial records to the finance committee. This group prepares the annual forecast and approves major disbursements, but is not involved in collections or record keeping. No internal or independent audit has been considered necessary in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years.
The offering at the weekly service is taken by a team of ushers. The head usher counts the offering in the church office following each service. He then places the offering and a notation of the amount counted in the church safe. The next morning the financial secretary opens the safe and recounts the offering. He withholds about $100 to meet cash expenditures during the coming week and deposits the remainder of the offering intact. In order to facilitate the deposit, members who contribute by check are asked to draw their checks to cash.
At their request, a few members are furnished pre-numbered, predated envelopes in which to insert their weekly contributions. The head usher removes the cash from the envelopes to be counted with the loose cash included in the offering and discards the envelopes. No record is maintained of issuance or return of the envelopes, and the envelope system is not encouraged.
Each member is asked to prepare a contribution pledge card annually. The pledge is regarded as a moral commitment by the member to contribute a stated weekly amount. Based upon the amount shown on the pledge cards, the financial secretary furnishes a letter requesting members to support the tax deductibility of their contributions.
Describe the weaknesses and recommend improvements in procedures for:
a. Offerings given at weekly services.
b. Record-keeping for members’ pledges and contributions.