You are in charge of the audit field work of a multi¬ national public company with subsidiaries in Europe, Asia, and South America, which has expanded very rapidly over the last few years. Your firm has recognized that public accounting firms perform audit examinations in those coun¬ tries in which subsidiaries are located. The following para¬ graphs are extracted from a letter received from one of these public accounting firms just prior to the issuance of your audit opinion on the consolidated financial statements. As in past years, your planned audit opinion contained no qualifications. The subsidiary audited by the public accounting firm that sent you the letter accounts for approximately 20 percent of consolidated sales, net income, and assets.

Our review of cash expenditures revealed a number of payments to senior government officials amounting to approximately 50 percent of net income before taxes. These payments have been recorded as promotional expenses. We were unable to obtain documentary evidence to support the nature of these payments, but client management personnel claim that these payments were necessary in order to obtain government approval for some client sales contracts. We were informed that these payments represent donations to political campaign funds.

Although we have no direct evidence, we believe that these payments have been instrumental in obtaining a number of very profitable contracts that contributed over 50 percent of sales.

Finally, our discussions with client personnel, all of whom are citizens of this country, lead us to believe that they took it upon themselves to authorize these payments. We found no evidence to suggest that the payments were made known in advance to head office management. However, we cannot state whether head office management was subsequently informed of these payments.

Required Discuss your professional responsibilities in this situation assuming the two following situations:

a. Donations to political campaign funds are legal in the subsidiary's coimtry.

b. Donations to political campaign funds are illegal in the subsidiary's country.
(CICA adapted)