You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several matters came to light during your most recent review of client invoice files: Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended 28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued imminently. Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices relating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you notice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager responsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse, with the following comment handwritten on the invoice: ‘rental space being used for storage of Miss Hobson’s speedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice, Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Co sometimes uses the empty warehouse for rental income, though this is not the main trading income of the company. In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a client of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply Co to several audit clients regarding the supply of bespoke accounting software’. Required: Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend what action, if any, Smith & Co should now take in respect of: (a) Norman Co; (b) Wallace Co; and (c) Software Supply Co.

You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several matters came to light during your most recent review of client invoice files: Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended 28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued imminently. Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices relating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you notice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager responsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse, with the following comment handwritten on the invoice: ‘rental space being used for storage of Miss Hobson’s speedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice, Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Co sometimes uses the empty warehouse for rental income, though this is not the main trading income of the company. In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a client of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply Co to several audit clients regarding the supply of bespoke accounting software’. Required: Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend what action, if any, Smith & Co should now take in respect of: (a) Norman Co; (b) Wallace Co; and (c) Software Supply Co.

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter4: Professional Liability, Auditor Judgment Frameworks, And Professional Responsibilities

Section: Chapter Questions

Problem 54RSCQ

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You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several matters came to light during your most recent review of client invoice files: Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended 28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued imminently. Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices relating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you notice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager responsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse, with the following comment handwritten on the invoice: ‘rental space being used for storage of Miss Hobson’s speedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice, Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Co sometimes uses the empty warehouse for rental income, though this is not the main trading income of the company. In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a client of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply Co to several audit clients regarding the supply of bespoke accounting software’.
Required:
Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend what action, if any, Smith & Co should now take in respect of:
(a) Norman Co;
(b) Wallace Co; and
(c) Software Supply Co.

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