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Alia Ejaz Khan Acc 723 Case 5.1 Cardillo Travel Systems Inc. 1. Three accountants faced an ethical problem. One account, Russell Smith was the controller for Cardillo, the other two accountants were engagement partners named Helen Shepherd and Roger Shlonsky. The two engagement partners had an issue of whether they should accept the insufficient explanation agreed for a highly suspicious transaction or should they risk losing the client by simply inquiring and asking for more details about the transaction or ask them to fix that transaction. On the other hand, Russell smith had to handle an issue of losing his job because he refused to cooperate with Rognlien or go against all his ethical responsibilities and principles towards his profession. People who were mainly affected by the outcome of such issues were the stockholders and creditors of Cardillo along with the three accountants mentioned above. These accountants had a personal liability and accountability to the stockholders and creditors of the company. They are very dependent on the financial data of the company which help them to make their decisions such as investing in the company and etc. Also, part of their responsibilities was to guide them to the right pathway towards executives of the company who were the ones influencing the accountants. Moreover, part of their responsibility towards their work as well as their coworkers is to always maintain a professional relationship consisting of dignity and honesty. Each of the people had satisfied their responsibility appropriately. But, Smith did take a risk of losing his job because he intended on doing what was ethically right in relation to his profession. He went against financial statements. The other two accounts fulfilled their responsibility in the sense that Shepherd revealed the issues in the letter 8k and Shlonsky resigned from his position as an independent auditor. 2. The accountant should always perform analytical procedures to look for such material misstatements in the financial statements. The following shows a few examples of such procedures: 1. First, one can have written confirmations from the executives of the company for the accuracy of the interim financial statements. 2. Second, one can have an inquiry from the management regarding any change in the internal controls ever since the recent financial statement audit. 3. Finally, one can perform the analytical procedures to observe if the statements were prepared in accordance with GAAP. In my opinion, the auditors of Touche Ross did tend to take appropriate steps to corroborate the entry. This is due to their acceptance of the explanation given by Lawrence that it was a commission which was received by Cardillo from United Airlines. On the other hand, if they had performed further procedures and told Shepherd about the entry, then she would have asked for the confirmations during the second quarter and not in November to corroborate the entry. 3. The suspicious entry of $203,000 could have been created in the following situations: 1. First situation is when Lawrence misrepresented the auditors in terms of the entry in the second quarter 10Q 2. Secondly, Lawrence misrepresented to Shepherd in terms of stating that the entry was legal. 3. Finally, Rognlien’s statement which stated that the “secret agreement was between him and the Chairman of United Airlines and not to refund the $203,000 under any conditions.” Other than these false statements the evidence that was gathered by Helen Shepherd showed that the entry was misstated. This is because she received a confirmation from the United Airlines stating that the amount was refundable up to $1990.00 if some stipulations between the two companies were not fulfilled. Rognlien’s behavior of not letting Shepherd contact the Chairman of United Airlines to inquire

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  • 3/14/2015 CardilloTravelSystems,Inc

    http://www.termpaperwarehouse.com/print/CardilloTravelSystemsInc/205880 1/2

    AliaEjazKhanAcc723Case5.1CardilloTravelSystemsInc.

    1.Threeaccountantsfacedanethicalproblem.Oneaccount,RussellSmithwasthecontrollerforCardillo,theothertwoaccountantswereengagementpartnersnamedHelenShepherdandRogerShlonsky.Thetwoengagementpartnershadanissueofwhethertheyshouldaccepttheinsufficientexplanationagreedforahighlysuspicioustransactionorshouldtheyrisklosingtheclientbysimplyinquiringandaskingformoredetailsaboutthetransactionoraskthemtofixthattransaction.Ontheotherhand,RussellsmithhadtohandleanissueoflosinghisjobbecauseherefusedtocooperatewithRognlienorgoagainstallhisethicalresponsibilitiesandprinciplestowardshisprofession.PeoplewhoweremainlyaffectedbytheoutcomeofsuchissueswerethestockholdersandcreditorsofCardilloalongwiththethreeaccountantsmentionedabove.Theseaccountantshadapersonalliabilityandaccountabilitytothestockholdersandcreditorsofthecompany.Theyareverydependentonthefinancialdataofthecompanywhichhelpthemtomaketheirdecisionssuchasinvestinginthecompanyandetc.Also,partoftheirresponsibilitieswastoguidethemtotherightpathwaytowardsexecutivesofthecompanywhoweretheonesinfluencingtheaccountants.Moreover,partoftheirresponsibilitytowardstheirworkaswellastheircoworkersistoalwaysmaintainaprofessionalrelationshipconsistingofdignityandhonesty.Eachofthepeoplehadsatisfiedtheirresponsibilityappropriately.But,Smithdidtakeariskoflosinghisjobbecauseheintendedondoingwhatwasethicallyrightinrelationtohisprofession.Hewentagainstfinancialstatements.TheothertwoaccountsfulfilledtheirresponsibilityinthesensethatShepherdrevealedtheissuesintheletter8kandShlonskyresignedfromhispositionasanindependentauditor.

    2.Theaccountantshouldalwaysperformanalyticalprocedurestolookforsuchmaterialmisstatementsinthefinancialstatements.Thefollowingshowsafewexamplesofsuchprocedures:1.First,onecanhavewrittenconfirmationsfromtheexecutivesofthecompanyfortheaccuracyoftheinterimfinancialstatements.2.Second,onecanhaveaninquiryfromthemanagementregardinganychangeintheinternalcontrolseversincetherecentfinancialstatementaudit.3.Finally,onecanperformtheanalyticalprocedurestoobserveifthestatementswerepreparedinaccordancewithGAAP.Inmyopinion,theauditorsofToucheRossdidtendtotakeappropriatestepstocorroboratetheentry.ThisisduetotheiracceptanceoftheexplanationgivenbyLawrencethatitwasacommissionwhichwasreceivedbyCardillofromUnitedAirlines.Ontheotherhand,iftheyhadperformedfurtherproceduresandtoldShepherdabouttheentry,thenshewouldhaveaskedfortheconfirmationsduringthesecondquarterandnotinNovembertocorroboratetheentry.

    3.Thesuspiciousentryof$203,000couldhavebeencreatedinthefollowingsituations:1.FirstsituationiswhenLawrencemisrepresentedtheauditorsintermsoftheentryinthesecondquarter10Q2.Secondly,LawrencemisrepresentedtoShepherdintermsofstatingthattheentrywaslegal.3.Finally,RognliensstatementwhichstatedthatthesecretagreementwasbetweenhimandtheChairmanofUnitedAirlinesandnottorefundthe$203,000underanyconditions.OtherthanthesefalsestatementstheevidencethatwasgatheredbyHelenShepherdshowedthattheentrywasmisstated.ThisisbecauseshereceivedaconfirmationfromtheUnitedAirlinesstatingthattheamountwasrefundableupto$1990.00ifsomestipulationsbetweenthetwocompanieswerenotfulfilled.RognliensbehaviorofnotlettingShepherdcontacttheChairmanofUnitedAirlinestoinquire

  • 3/14/2015 CardilloTravelSystems,Inc

    http://www.termpaperwarehouse.com/print/CardilloTravelSystemsInc/205880 2/2

    aboutthesecretagreementshowstheevidenceofthefraudulententry.Themainissuethattheauditorsshouldhavelookedwhentheywereanalyzingthisentrywastheissueofreliability.Thisisbecausetheonlyevidencethatwasavailablewasoralrepresentationbytheclientandaccordingtotheaccountingstandardssufficientauditevidenceisrequiredtosupportthefinancialstatements.Inthiscase,thisevidenceshouldhavecomefromthethirdpartyconfirmationswhicharetakentobemorereliablecomparedtoclientrepresentation.Asaresult,Shepherdobservedthatthedecisionwasbasedontheconfirmationsfromthirdparty.

    4.IbelieveShepherddidnottendtoviolateanyrulebydiscussingthecontroversyoftheentryintheletter8K.AccordingtotheCodeofProfessionalConducttheauditorshadtherighttodisclosetheconfidentialinformationtoregulatoryauthoritiesandShepherdwasnotobligatedtowardsCardillorelatingtowhatshewantedtopresentinthe8Kexhibitletter.

    5.TheAICPAsqualitycontrolstandardstendtorequiretheCPAfirmstohavesuchpoliciesandadoptproceduresthatwillaidtheminidentifyingaclientwhotendtolackintegrity.Thisenablesabetterdecisionintermsofacceptingaclient.Forinstance,thefollowingproceduresmightbeperformed:1.First,performthebackgroundcheckonalltheexecutivesofthefirmoranypeoplewhoarelinkedtotheperspectiveclient.2.Second,theycouldinquirethepredecessorauditfirmabouttheirpurposeofquestioningtheintegrityoftheclient.


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