Biggie Corporation is a large audit client of your public accounting firm. Although U.S.-based, Biggie's operations extend to many foreign countries as well, both directily and through subsidiaries. One such subsidiary is Smallie Co., a profitable athletic shoe manufacturer in the country of North Malanam. North Malanam has no laws against the bribing of public officials.

During the current year, you discover that $75,000 was deposited by a Smallie agent, as an apparent bribe, in the bank account of a North Malanam public official. Smallies management generated the funds by selling company vehicles that had been fully depreciated on Smallies books.You are concerned about this act committed by Smallies management and decide to discuss the matter with Biggies management and legal counsel.

Biggies 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 dollar amount. They also believe that it is unnecessary to take any steps to prevent Smallies management from engaging in such activities in the future. In turn, Biggies legal counsel indicates that the probability is remote that such an act would ever be discovered, and that if discovery were to occur, relevant penalties would be immaterial to the clients consolidated financial statements.

Your CPA firm is ready to issue the integrated audit report on Biggies 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.

A. Assume Biggie falls within the jurisdiction of the SEC.

List and summarize relevant laws and auditing standards.

Discuss the implications of this act by Smallies management. How would the aforementioned discovery affect your firm's audit perspective?

Describe the courses of action that are available to your CPA firm regarding this matter. Think in terms of the audit report.

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

B. Assume that Biggie falls outside the jurisdiction of the SEC.

How will your responses to part "A" stay the same? How will they change? Explain, numbering 1 through 4, as above.