#1. WAN Corporation is a large multinational audit client of your CPA firm. One of WAN's subsidiaries, MINE Ltd., is a successful electronics assembly company that operates in a small Pacific country. The country in which MINE operates has very strict laws governing the transfer of funds to other countries. Violations of these laws may result in fines or the expropriation of the assets of the company. During the current year, you discover that $500,000 worth of foreign currency was smuggled out of the Pacific country by one of MINE's employees and deposited in one of WAN's bank accounts. MINE's management generated the funds by selling company automobiles, which were fully depreciated on MINE's books, to company employees. You are concerned about this illegal act committed by MINE's management and decided to discuss the matter with WAN's management and board of directors seem to be unconcerned with the matter and express the opinion that you are making far too much of a situation involving an immaterial peso amount. They also believe that it is necessary to take any steps to prevent MINE's management from engaging in illegal activities in the future. WAN's legal counsel indicates that the probability is remote that such an illegal act would not be material to the client's consolidated financial statements. Your CPA firm is ready to issue the integrated audit report on WAN's financial statements and internal control for the current year, and you are trying to decide on the appropriate course of action regarding the illegal act.

Required:

a. Discuss the implications of this illegal act by MINE's management.

b. Describe the courses of action that are available to your CPA firm regarding this matter.

c. State your opinion as to the course of action that is appropriate. Explain.

#2. During the pre-audit conference for Quicky, Inc., the senior auditor described for the new staff people assigned to this year's audit the essential characteristics of Quicky's internal control system. In the payroll cycle, controls have been found to be severely lacking; however, the auditors have been reasonably satisfied with the controls within the other cycles. In the past, the controls over cash receipts have been evaluated as excellent. Within the payroll area, material errors and irregularities can occur readily. Supervisors do not review time cards prepared by employees; pay rates, hours extensions and withholdings are not reviewed independently. Paychecks, after being signed, are returned to department supervisors for distribution.

Required:

a. What alternatives are available to auditors for dealing with weak financial control subsets? What possible effects might the absence of payroll controls have on the financial statements in this case?

b. What steps should the auditor take if, based on the initial review, controls are thought to be adequate?

c. Although the control procedures relating to cash receipts have been excellent in the past, they should be re-evaluated again this year.

1) Why is it necessary for the auditors to study and evaluate internal control each year?

2) Why is a minimum audit necessary notwithstanding excellent controls?