Cardillo Travel Systems Q1 The Security and Exchange Commission has a legal man to protect investors or the public from unscrupulous public companies that will falsify their account to portray a certain financial image. Investors or the public rely on the published accounts in making their decisions on whether to invest in a company (Dicksee, 2009). As such, if a company published inaccurate financial records the investors or the users will be deceived into investing in the entity or otherwise. Auditors are tasked with the duty of ascertaining that a company maintains proper internal controls, there is proper recording of an entity’s transaction, records meet the relevant provision of accounting and auditing and most importantly, the records make a fair representation of the state of financial affairs in the company.
To establish the above matters, the auditor will seek clarifications from the accounting department and the company executive. If the company employees fail to provide the much-needed cooperation to enable the auditor do his work properly, then the auditor should. In this case study, Cardillo’s executives cooperate with the intention to deceive the auditor.
An amount $ 203,000 was recorded as an income that would be received in the current financial period yet it was a negotiated amount subject to a contract for expenses incurred to shift systems. The executives sought to justify its inclusion by deceiving the auditor. As such, they can be sued for making false representation to an outside auditor. The amount was to cover expenses relating to a shift from the American Airline Sabre system to the United Airline Apollo system. If Cardillo did not incur any cost in shifting from one system to another then the amount in question was refundable to United Airline.
The amount was therefore receivable in certain issues transpired. Cardillo executives, in particular, Smith have a duty to disclose the true nature of any transaction in their books. Cardillo as a public company has a duty to maintain accurate financial records. The entity’s transactions should be recorded correctly in the relevant accounts. Nonetheless, Cardillo’s executives are looking into ways of making the reimbursement to be received from United Airline seem like a income receivable in the current financial period yet the source documents relating to the transaction state that the two entities Cardiloo and United Airline are still negotiating.
In addition, the income would only be receivable once the contract expires and Cardillo incurs expenses in transitioning from one system to another. Once the ruling on the suit was made, the executive are obligated to make a communication to the SEC with regard to the implications of such a ruling. Before the ruling, Cardillo was experiencing liquidity challenges, which were worsened by the judgment, which required the entity to pay $ 685,000 (The institute of internal Auditors, 2009).
Such a matter should have been reported immediately to the SEC since it is material nature. The Cardillo executives violated provisions relating to insider trading which prevent managers or company insiders from using privileged information to buy or sell shares or stock. In the above, case Rognlien breaches the provision by reducing the stakeholders’ shareholding below three million dollars as set by the court. In addition, the details of the sale of stock were not disclosed fully.
Rognlien should have disclosed the details fully prior to making the sale. Such a sale may result in the plummeting of the share value, which would result in losses for the members of the public who have invested in the entity. The SEC has a duty to ensure that such activities do not transpire in publicly traded companies. Q2 The AICPA’s Code of Professional Conduct establishes the way in which individuals in the accounting professional should undertake their professional work.
It also establishes their responsibilities to their employers and the public while also listing a number of values that should guide them. In the above cases study, there were numerous violations of the AICPA’s Code of Professional Conduct. Smith was a reporting officer at Cardillo, whose work entailed recording transactions. He realized that the amount $ 203, 000 could not be recorded as an income for the current period as it was subject to negotiations and the organization incurring certain expenses.
In this case, Smith was right to object such a step that would have compromised his integrity as an accountant (AICPA Professional Standards, 2013). Smith was therefore complying with the code of conduct while Rognlien was in contravention of the provisions and values of the code of conduct. Lawrence as an executive also contravened the AICPA’s Code of professional conduct since he lied to the auditors that the amount $ 203,000 was a receivable income. The auditors were systematic in their work and later corroborated the details of the transaction.
Shepherd, the auditor supervising the audit, complied with the provisions by approaching the suspicious transaction objectively and independently by corroborating various opinions on the matter to establish the truth. Q3 Cardillo executives’ action outside of the auditor compromised the ability of the auditors to unearth important information with regard to their clients’ records. Their action increased the audit risk of the entire process. For instance, the Cardillo executives were deceitful with regard to a material item in the receivable accounts. The treatment of the amount to be received by Cardillo from United Airline as income rather than a reimbursement can change the profitability of the organization or the opinion of the auditor.
The auditor should have been more cautious in the management of risk with regard to this client since there are numerous contraventions of accounting and the SEC’s provisions in the treatment of various items. The fine passed on to the entity by a court ruling was a material item which can alter the auditors opinion yet it was not disclosed appropriately to the investor by the Cardillo executives which reveals that the executives intent to misguide the auditors (Giove, 2003).
Overall, the auditors were efficient in risk management since they unearthed all the relevant information to support an appropriate opinion. Q4 The five components of internal control were overlooked in Cardollo’s undertaking. For instance, there was no monitoring of the financial performance culminating in the underestimation of the loss by over three hundred percent. Periodic monitoring would have enabled the management to assess the profitability and estimate with relative accuracy the expected loss. There was no risk assessment in the entity, as the organization did not look into the possible outcomes of the case which would have necessitated the creation of a provisions to mitigate the losses expected in case of an adverse ruling. Q5 The auditor work entails verifying the records prepared.
From the case study, it is evident that the management’s decisions play a vital role in the preparation of accounts. As such, evaluating the decision-making would provide the auditor with a better understanding of what is transpiring in the organization and how the management treated different accounting items for the sake of recording.
Assessing management decisions would make the auditors’ work much easier and thorough. In conclusion, the auditors have a duty to evaluate the management’s decisions. References AICPA Professional Standards. (2013). Code of Professional Conduct and By laws. New York, NY: American Institute of Certified Public Accountants. Dicksee, L., (2009). Auditing: A Practical Manual for Auditors. New York, NY: BilbioBazaar. Giove, F. (2003). Auditing Essentials. New Jersey, NJ: Research Education Association Press. The institute of internal Auditors. (2009). The Role Internal Auditing Enterprise-Wide Risk Management. Retrieved on August 9, 2014 from https: //na. theiia. org/standards-guidance/Public%20Documents/PP%20The%20Role%20of%20Internal%20Auditing%20in%20Enterprise%20Risk%20Management. pdf