Scenario Two: (500 Words)
Eric, a young CPA and one of the audit team members for ABC Pty Ltd, has developed very good insights into the company’s systems in the last 12 months and was asked by his partner, John, to draft a report on the reliability of internal control at ABC for review. The report is to be used as a part of a due diligence assurance engagement for ABC’s prospectus. ABC wants to be listed on Australian Securities Exchange by coming June.
In carrying out the review, Eric finds a number of matters that concern him. He notices that the controls over inventory requisitions are very poor, leading to numerous complaints from customers about delays and wrong deliveries, and cancellations.
Moreover, the inventory records do not show the history or the values of the inventory, so that estimates were used to arrive at the year-end inventory. He also noticed the poor standard of appliances, with manufacturers’ warranties long expired.
Eric completes his report, with details of the poor internal controls for his partner’s review. However, his partner replaces his report with a very brief summary, and a conclusion that the internal control systems are sound and reliable.
Eric makes an appointment to see John, but is worried as to how he should approach him about ABC’s issues.
Discuss the professional and ethical issues faced by Eric and provide an analysis deal with the matter with John.