Financial Statement Audit
Discussion Case 2-39
a. There are three factors that should be considered when illegal activity occurs. The first factor an auditor should consider is how the occurrence effects the financial statement and the penalty, if any, for the issue. The second factor to be considered is the integrity of the management staff and their reaction to the illegal occurrence. The last factor for an auditor to consider when an illegal occurrence happens is the internal controls over the financial reporting.
“Smuggling” money into the US can result in fines. “Smuggling” from the Caribbean could mean a loss of Ultro, Ltd. Assets. The US requires taxes be paid on any capital brought into the US from any foreign subsidiary. According to the Wall Street Journal this can protect up to 40% of profits.
b. There are several actions that the auditing firm could take place when faced with this type of dilemma. One being the CPA firm could resign as the auditing firm for Enormo. Another action the firm could take would be to file an unqualified opinion, which no further action would need to be taken. “An unqualified opinion is issued when the independent auditor believes that the company 's financial statements are sound; that is, the statements are free from material misstatements” (Investopedia).
The CPA firm did the right thing by discussing the issue with management; however the lack of concern would warrant the firm to reach out to a higher level of management, if this is a possibility. The firm should consider looking further into the company, Enormo to see if there have been anymore fraudulent activities. This would help the firm decide if this was a onetime event or if the company seems to have reoccurring events.
c. I feel my CPA firm should resign from the assignment. My reasons are based on the actions management took, or should I state lack thereof, towards resolving the illegal actions. They had no interest in
Cited: Thurm, Scott and Kate Linebaugh. “More U.S. Profits Parked Abroad, Saving on Taxes”. The Wall Street Journal. 10 March 2013. Dow Jones and Company. 2013. Web. 14 May 2013. "Unqualified Opinion." Definition. Investopedia US. 2013. Web. 14 May 2013.