Eric and Alan both completed their tertiary accounting qualifications at University of Newcastle. Their close contact continued
Question:
Eric and Alan both completed their tertiary accounting qualifications at University of Newcastle. Their close contact continued with their first job as they both obtained employment with T&S Chartered Accountants (T&S). Eric was employed in the Corporate Advisory Services section and Alan in audit. Over the next three years, they completed their professional exams and both were admitted as Chartered Accountants at the same graduation ceremony.
Soon after on Is' July 20X7, Eric left T&S and joined one of the firm's audit clients called Cement Manufacturing Pty Ltd to become their financial controller. Alan remained with T&S and was soon promoted to the position of Audit Manager. Alan also became the audit manager for Cement Manufacturing. The two were pleased they could still have some professional contact even though they no longer worked for the same firm.
It is April 20X8 and Alan and his audit team are conducting the interim audit of Cement Manufacturing. He becomes aware that Eric's spouse (Edwina) has recently been seriously ill and Eric has been experiencing some financial pressures associated' with the expensive medical treatment for Edwina.
Alan asked an audit junior Jackie Yong to undertake the interim testing of Cement Manufacturing's payroll cycle as per the audit program. Jackie completed the task and there seemed to be no problems, although the working papers revealed the following note:
File note: PAYG tax instalments. Employee 'Pay As You Go' (PAYG) income tax deductions are paid to the Australian Taxation Office in accordance with usual lodgement requirements on the required business day of each subsequent month. Checked four months and found that part of the December remittance was slightly late so I discussed the matter with Eric and he explained this was a direct debit error by the bank. I traced the amount to the company's other bank account and it agreed OK The procedures are therefore generally in line with the company's internal control policies and our previous experience. However, the remittance due in February was paid late. I discussed the delay with the Payroll Clerk and she advised that the directive had come from upper management, namely Eric, and he advised that it was due to a change of accounting system. I examined the PAYG Tax file. The Tax Office noted the delay but it 'had decided not to impose a fine because it was the first time the Company's remittance had been late. Considered a minor issue. No financial effect, and not material. No further action required. J. Yong
Alan was about to sign off on Jackie's findings but was worried that the audit team had not detected the change in the company's accounting system earlier. He thought he should investigate this anomaly further to ensure that everything was OK. He obtained an audit trail of the clearing account for the PAYG tax for January and February. The account read as follows:
Alan immediately noticed that the reason that the payment to the Taxation Office was late was because the Clearing Account did not have a sufficient balance to pay the full amount on 112/X8. The reason was the apparent temporary transfer of funds to an account in the company's general ledger called Miscellaneous Suspense account. This was a perplexing entry. Alan investigated this account and discovered the following:
Alan was curious about this transaction so he arranged to obtain a copy of the paid cheque for $12,345 dated 18/1/X8 from the bank. The cheque was made out to Newcastle Private Hospital. He also checked the receipting of the same amount of money on 9/2/X8. The receipt was for cash and the signature of the person writing the receipt was illegible. Alan needed to know why company funds for PAYG tax had been temporarily diverted to the hospital. Because of Eric's recent problems with medical bills Alan suspected that Eric was somehow involved.
Alan presented this information to Eric. Eric immediately confided in Alan and told him that he needed the money to pay his wife's medical bills. Eric had known, however, that he had some family money (an inheritance) due to him in a couple of weeks later and that he would be able to repay it. He had used the PAYG Tax Clearing account and the Miscellaneous Suspense account in an effort to cover-up the transaction. Eric explained that the company suffered no loss or financial penalty and that the money was eventually repaid. He also told Alan that the amount involved must be below the audit materiality level so Alan should not worry. Alan agreed that it was, indeed, below the materiality level of $125,000 and that it would normally not worry him, because there was no residual loss to the audit client.
Alan is comfortable with Eric's explanation but before signing off on the matter he decides to give you a call, as you are also a university friend and a chartered accountant like both Eric and Alan. Alan would normally speak to his audit partner Mr Morgan, but does not want to create unnecessary problems and decides to deal with it himself.
You work for another firm of chartered accountants. You are also an audit manager. Andy shows you the audit working papers for Cement Manufacturing relating to the PAYG tax matter and asks your opinion. You are aware of the lifelong friendship between Alan and Eric.
RequiredList and briefly explain any legal, ethical and other issues involved in the case which may have an impact on Eric's position, Alan's position as the audit
Intermediate Accounting principles and analysis
ISBN: 978-0471737933
2nd Edition
Authors: Terry d. Warfield, jerry j. weygandt, Donald e. kieso