Business Ethics Test Notes

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Case Test 3
Chapter 12 Ethics Case 12-45

1. If the purchase had been handled properly by the controller this transaction may have been considered within ethical standards. However, evidence of weaknesses in internal control over inventory and possible management override of computerized records, that in all appearances increase the risk of adulterated inventory counts and computerized records in general, warrant response from the auditing team during their assessment of financial statements. Although the number of shirts sold to the auditing team do not constitute a material misstatement in regards to the financial statements, the risk related to fraud should be assessed and mitigated during the planning and carrying out of the audit and further audit procedures. These transactions do not affect the existence and valuation assertions relevant to auditing. The right and obligations assertions, on the other hand, may be impacted as physical counts of inventory and their accuracy and completeness come into question. The auditor should be wary of procedures related to physical counts of inventory. Extra care to mitigate intentional or misintentional inclusion of inventory in the physical count should be countered by the auditing team. Additionally, the audit should further address the implications of the ability of management to override perpetual inventory records and computerized information in general in all other areas of the audit to assure that relevant risks are mitigated and minimized. Outside of the effects on the auditing process, this case does not affect the opinion of the auditor on the audited financial statements. In spite of this, the client should be made aware of the discovery.

Although the likelihood of material misstatement of the financial records due to this occurrence is unlikely, the auditor may find that purchase of the shirts negatively impacts thee appearance of independence of the auditor and the level of confidence...
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