3/14/2015

CardilloTravelSystems,Inc

AliaEjazKhan
Acc723
Case5.1
CardilloTravelSystemsInc.
1.Threeaccountantsfacedanethicalproblem.Oneaccount,RussellSmithwasthecontrollerfor
Cardillo,theothertwoaccountantswereengagementpartnersnamedHelenShepherdandRoger
Shlonsky.Thetwoengagementpartnershadanissueofwhethertheyshouldaccepttheinsufficient
explanationagreedforahighlysuspicioustransactionorshouldtheyrisklosingtheclientbysimply
inquiringandaskingformoredetailsaboutthetransactionoraskthemtofixthattransaction.
Ontheotherhand,Russellsmithhadtohandleanissueoflosinghisjobbecauseherefusedtocooperate
withRognlienorgoagainstallhisethicalresponsibilitiesandprinciplestowardshisprofession.People
whoweremainlyaffectedbytheoutcomeofsuchissueswerethestockholdersandcreditorsofCardillo
alongwiththethreeaccountantsmentionedabove.Theseaccountantshadapersonalliabilityand
accountabilitytothestockholdersandcreditorsofthecompany.Theyareverydependentonthefinancial
dataofthecompanywhichhelpthemtomaketheirdecisionssuchasinvestinginthecompanyandetc.
Also,partoftheirresponsibilitieswastoguidethemtotherightpathwaytowardsexecutivesofthe
companywhoweretheonesinfluencingtheaccountants.Moreover,partoftheirresponsibilitytowards
theirworkaswellastheircoworkersistoalwaysmaintainaprofessionalrelationshipconsistingof
dignityandhonesty.
Eachofthepeoplehadsatisfiedtheirresponsibilityappropriately.But,Smithdidtakeariskoflosing
hisjobbecauseheintendedondoingwhatwasethicallyrightinrelationtohisprofession.Hewent
againstfinancialstatements.Theothertwoaccountsfulfilledtheirresponsibilityinthesensethat
Shepherdrevealedtheissuesintheletter8kandShlonskyresignedfromhispositionasanindependent
auditor.
2.Theaccountantshouldalwaysperformanalyticalprocedurestolookforsuchmaterialmisstatements
inthefinancialstatements.Thefollowingshowsafewexamplesofsuchprocedures:
1.First,onecanhavewrittenconfirmationsfromtheexecutivesofthecompanyfortheaccuracyofthe
interimfinancialstatements.
2.Second,onecanhaveaninquiryfromthemanagementregardinganychangeintheinternalcontrols
eversincetherecentfinancialstatementaudit.
3.Finally,onecanperformtheanalyticalprocedurestoobserveifthestatementswerepreparedin
accordancewithGAAP.
Inmyopinion,theauditorsofToucheRossdidtendtotakeappropriatestepstocorroboratetheentry.
ThisisduetotheiracceptanceoftheexplanationgivenbyLawrencethatitwasacommissionwhichwas
receivedbyCardillofromUnitedAirlines.Ontheotherhand,iftheyhadperformedfurtherprocedures
andtoldShepherdabouttheentry,thenshewouldhaveaskedfortheconfirmationsduringthesecond
quarterandnotinNovembertocorroboratetheentry.
3.Thesuspiciousentryof$203,000couldhavebeencreatedinthefollowingsituations:
1.FirstsituationiswhenLawrencemisrepresentedtheauditorsintermsoftheentryinthesecond
quarter10Q
2.Secondly,LawrencemisrepresentedtoShepherdintermsofstatingthattheentrywaslegal.
3.Finally,Rognliensstatementwhichstatedthatthesecretagreementwasbetweenhimandthe
ChairmanofUnitedAirlinesandnottorefundthe$203,000underanyconditions.
OtherthanthesefalsestatementstheevidencethatwasgatheredbyHelenShepherdshowedthatthe
entrywasmisstated.ThisisbecauseshereceivedaconfirmationfromtheUnitedAirlinesstatingthatthe
amountwasrefundableupto$1990.00ifsomestipulationsbetweenthetwocompanieswerenot
fulfilled.RognliensbehaviorofnotlettingShepherdcontacttheChairmanofUnitedAirlinestoinquire
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aboutthesecretagreementshowstheevidenceofthefraudulententry.
Themainissuethattheauditorsshouldhavelookedwhentheywereanalyzingthisentrywastheissueof
reliability.Thisisbecausetheonlyevidencethatwasavailablewasoralrepresentationbytheclientand
accordingtotheaccountingstandardssufficientauditevidenceisrequiredtosupportthefinancial
statements.Inthiscase,thisevidenceshouldhavecomefromthethirdpartyconfirmationswhichare
takentobemorereliablecomparedtoclientrepresentation.Asaresult,Shepherdobservedthatthe
decisionwasbasedontheconfirmationsfromthirdparty.
4.IbelieveShepherddidnottendtoviolateanyrulebydiscussingthecontroversyoftheentryinthe
letter8K.AccordingtotheCodeofProfessionalConducttheauditorshadtherighttodisclosethe
confidentialinformationtoregulatoryauthoritiesandShepherdwasnotobligatedtowardsCardillo
relatingtowhatshewantedtopresentinthe8Kexhibitletter.
5.TheAICPAsqualitycontrolstandardstendtorequiretheCPAfirmstohavesuchpoliciesandadopt
proceduresthatwillaidtheminidentifyingaclientwhotendtolackintegrity.Thisenablesabetter
decisionintermsofacceptingaclient.Forinstance,thefollowingproceduresmightbeperformed:
1.First,performthebackgroundcheckonalltheexecutivesofthefirmoranypeoplewhoarelinkedto
theperspectiveclient.
2.Second,theycouldinquirethepredecessorauditfirmabouttheirpurposeofquestioningtheintegrity
oftheclient.

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