Jan Sharpe recently joined the public accounting firm of Spark, Watts, and Wilcox. She quickly established a repu¬ tation for thoroughness and a steadfast dedication to follow¬ ing prescribed auditing procedures to the letter. On her third audit for the firm, Sharpe examined the underlying docu¬ mentation of 200 disbursements as a test of purchasing, receiving, vouchers payable, and cash disbursement proce¬ dures. In the process, she found 12 disbursements for the purchase of materials with no receiving reports in the docu¬ mentation. She noted the exceptions in her working papers and called them to the attention of the in-charge accountant. Relying on prior experience with the client, the in-charge accountant disregarded Sharpe's comments, and nothing further was done about the exceptions.

Subsequently, it was learned that one of the client's pur¬ chasing agents and a member of its accounting department were engaged in a fraudulent scheme whereby they diverted the receipt of materials to a public warehouse while sending the invoices to the client. When the client discovered the fraud, the conspirators had obtained approximately $70,000, $50,000 of which was recovered after the completion of the audit.

Required Discuss the legal implications and liabilities to Spark, Watts, and Wilcox as a result of the facts just described.

(AICPA adapted)