Question
Karen Winkler is the senior partner in Three Rivers International Public Accounting firm, whose main office is in Pittsburgh. She is the partner in charge
Karen Winkler is the senior partner in Three Rivers International Public Accounting firm, whose main office is in Pittsburgh. She is the partner in charge of a first-time audit of the financials for Weezo Beverage Company, which bottles and distributes soft drinks throughout the United States and Latin America. After about two weeks into the audit, Dick Clemens, the senior audit manager assigned to the engagement, comes to Karen with some bad news: Weezos internal controls are a total mess. They dont even do bank reconciliations, says Dick. I dont see any way youre going to be able to give this company a clean opinion. Dont worry about it, said Karen. Its a private company. Yes, says Dick, but because there are no controls, were going to need to quadruple our sample sizes, and when we find irregularities in an account, well probably need to audit every single transaction in it. Karen does some quick math in her head. She had originally quoted Weezo $800,000 for the audit, but if Dick is correct, the cost will soar to several million dollars. Again, dont worry about it, says Karen. Well do our usual audit assuming a good internal control system. Then well look at our sampling results and estimate any errors in the accounts. If the errors are material, well simply ask the company to make a cor-responding adjustment to earnings. That way well be covered from liability. Remem-ber, were dealing with a private company here. We dont have to worry about Sarbanes-Oxley and SEC reports. The main thing is that the bottom line is good. Dick walks away scratching his head. What do you think of Karens approach to dealing with Weezos lack of internal controls?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started