Case Study 5.1

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Case 5.1 Cardillo Travel System, Inc.

Description: Smith is the Chairman of Cardillo Travel Agency, he just involved into a case that whether to sign the affidavit with United Airlines. Because he inspected that there is something wrong with the affidavit concerning Cardillo’s stockholders’ equity, so that he refused to sign affidavit. Just for this reason, he was kicked out from his position. Moreover, the other two of his executives Rognlien and Lawrence, just approved the $203,000 adjusting entry recorded link to Airlines-Cardillo transaction. Afterward, Helen Shepherd, an auditor of Touch Ross, found the mistake that the money cannot be recorded for the payment to Cardillo was refundable under certain conditions and thus not immediately as revenue, so she questioned Rognlien and Lawrence, but they still insisted the entry of the money has been properly recorded. And one year later, R and L just dismissed the Touch Ross accounting firm and hire KMG as their public accounting firm. After the turnover of KMG, they just founded this matter too, and resigned as the independent audit firm.

Q1: Accountants must notice the wrong do in confirmation of $203,000 as entry and proper recorded in Cardillo. They just face the dilemma of disclosing the wrong do in revenue or deceiving the outside auditor together with the executives. This kind of false activity directly influences the liquidity and then the profit of inventors and creditors of Cardillo may be affected. The initial responsibility that accountants should do to both internal and external accounting information users is to do account by rules through serious accounting procedures and do not cook the books for the sake of their own profit or just dare to be sacked. And the fact is that the accountants in firm Cardillo are lack of responsibility and afraid of being dismissed.

Q2: The procedure includes reviewing monetary fund’s and paid-in capital project, the review of exchange funds, including accounts...