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.