Common Law Responsibility for Errors and Fraud. Huffman & Whitman (H&W), alarge regional accounting firm, was engaged by Ritter Tire Wholesale Company to auditits financial statements for the year ended January 31. H&W had a busy audit engagement schedule from December 31 through April 1 and decided to audit Ritter’s purchasevouchers and related cash disbursements on a sample basis. The firm instructed staffmembers to select a random sample of 130 purchase transactions and gave directionsabout important deviations, including missing receiving reports. Boyd, the assistant incharge, completed the audit documentation, properly documenting the fact that 13 ofthe purchases in the sample had been recorded and paid without including the receivingreport (required by stated internal control procedures) in the file of supporting documents. Whitman, the partner in direct charge of the audit, showed the findings to Lock,Ritter’s chief accountant. Lock appeared surprised but promised that the missing receiving reports would be inserted into the files before the audit was over. Whitman was satisfied, noted in the audit documentation that the problem had been solved, and did not sayanything to Huffman about it.Unfortunately, H&W did not discover the fact that Lock was involved in a fraudulentscheme in which he diverted shipments of tires to a warehouse leased in his name and sentthe invoices to Ritter for payment. He then sold the tires for his own profit. Internal auditorsdiscovered the scheme during a study of slow-moving inventory items. Ritter’s inventorywas overstated by about $500,000 (20 percent), the amount Lock had diverted.Required:a. Do you believe H&W has any further audit responsibility with respect to the missingreceiving reports? Explain.b. Do you believe H&W failed to exercise the appropriate level of professional care? Whyor why not?
Common Law Responsibility for Errors and Fraud. Huffman & Whitman (H&W), a
large regional accounting firm, was engaged by Ritter Tire Wholesale Company to audit
its financial statements for the year ended January 31. H&W had a busy audit engagement schedule from December 31 through April 1 and decided to audit Ritter’s purchase
vouchers and related cash disbursements on a sample basis. The firm instructed staff
members to select a random sample of 130 purchase transactions and gave directions
about important deviations, including missing receiving reports. Boyd, the assistant in
charge, completed the audit documentation, properly documenting the fact that 13 of
the purchases in the sample had been recorded and paid without including the receiving
report (required by stated internal control procedures) in the file of supporting documents. Whitman, the partner in direct charge of the audit, showed the findings to Lock,
Ritter’s chief accountant. Lock appeared surprised but promised that the missing receiving reports would be inserted into the files before the audit was over. Whitman was satisfied, noted in the audit documentation that the problem had been solved, and did not say
anything to Huffman about it.
Unfortunately, H&W did not discover the fact that Lock was involved in a fraudulent
scheme in which he diverted shipments of tires to a warehouse leased in his name and sent
the invoices to Ritter for payment. He then sold the tires for his own profit. Internal auditors
discovered the scheme during a study of slow-moving inventory items. Ritter’s inventory
was overstated by about $500,000 (20 percent), the amount Lock had diverted.
Required:
a. Do you believe H&W has any further audit responsibility with respect to the missing
receiving reports? Explain.
b. Do you believe H&W failed to exercise the appropriate level of professional care? Why
or why not?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
