Nile Products is a conglomerate with subsidiaries in extractive oil and gas, consumer products, banking and insurance. The company was organized in 1902 and began operations as a mining company. It incorporated in New York in 1928, and it engaged in an initial public offering in 1948.

After becoming a publicly-owned entity, Nile expanded its lines of business and the geographical areas in which it does business. Nile now does business in twenty-nine states and thirteen countries in Europe, Africa, South America, and Australia. In 2018, Nile reported consolidated net income of approximately $804 Billion, which represented an increase of over $300 Billion from the prior year. The increase was primarily attributable to Niles subsidiaries in the extractive industries which had a banner year.

Niles executives included the following individuals:

• John Bonehead, President and Chief Executive Officer. Bonehead graduated from Yale University in 1965 with a degree in philosophy. After two years of service in the U.S. Army, where he achieved the rank of Private First Class, Bonehead joined Extract A, a Nile subsidiary in the gas extraction business, as a mailroom clerk. Bonehead worked in several areas before being appointed president in 1999.

• Mutt Rombers, Executive Vice President and Chief Operating Officer. Rombers graduated from Hampton Community College in 1998 with a degree in general studies. He began working in Niles executive offices as a vice president immediately after graduation. Rombers married Wanda Honda during his third year at Hampton. Wanda is the great granddaughter of Niles founder, And she owns approximately 11% of Niles Common Stock.

• Angelina Jerky, Chief Financial Officer. Angelina graduated from M.I.T. in 1976 with a degree in Nuclear Engineering. She received an MBA in Accounting from Pace University in 1978. Upon graduation from Pace, Angelina joined Arthur Andersen as a staff auditor. She left Anderson as a manager in 1982 to join Hecla Mining as Internal Audit Director. She joined Nile in 1990, and she was promoted to CFO in 1998.

• Ben Afflicted, Controller. Ben graduated from Boston University in 1982 with a degree in Biology. After he failed out of medical school in 1984, he pursued an acting career which was terminated, when he was admitted to a drug treatment facility. Bens aunt is Julia Louis Doofus who owns approximately 10% of Niles common stock, and who is also a member of Niles board of directors. Julia pulled a few strings on Bens behalf.

• Ruth Bader Goofball is chair of Nile's Audit committee. Ruth graduated from St. Johns Law School in 1960, and after practicing as an attorney specializing in family law for approximately 20 years, she was appointed as a family court judge. Ruth retired as a judge in 2015.

• Diane Frankenstein is also a member of Niles Audit Committee. Diane was a college classmate of Ruth Goofball at St. Johns. After college, Diane attended NYU where she received a PhD in Accounting. She has taught Accounting at St. Johns since receiving her PhD. In addition to serving on Niles Audit Committee, Diane serves as an accounting consultant to Niles controllership function for which service she receives $100,000 annually.

• Matt Dummy is the third member of Niles Audit committee. Matt is Niles Director of Marketing, and he has held that position for the past fifteen years.

• Tory Baloney is Niles general counsel. Tony graduated from Syracuse Law School in 1960, and he went to work in the Bronx D.A.s office, where he spent 21 years as an assistant district attorney. He left the D.A.s office to accept Niles offer to be general counsel.

• Cooper & Bloopers (C&B) are Niles Auditors. C&B are the only auditors which Nile has had since becoming a publicly-held entity.

• Harvey Bizarre is C&Bs audit partner assigned to the Nile engagement. Harvey purchased a home in East Hampton several years ago, and for the last three years he has spent most of his time there. He directs the audit from the beach via cell phone and computer. When he is not actively working, he spends most of his time watching HBO and CNN. Harvey, who is in his sixth year on the Nile engagement, will retire at the end of next year, and he believes that he should spend as much time as possible transitioning to retirement. Harvey is assisted on the Nile Audit by Partners in Houston, Louisville, Milan, Italy and Osaka, Japan.

• Johnny Dope is C&Bs Engagement Quality Review Partner (EQAB) for the Nile engagement.. Dope has been a partner for 22 years, all of which has been spent in investment company practice. C&B wants to expand Dopes experience by assigning Dope as Niles EQAR. Dope has no prior experience auditing publicly held companies.

Some facts relating to the most recent Nile Audit

• C&B noted two control issues relating to improper separation of duties in revenue cycles. It was a tough call, but bizarre concluded that they represented significant deficiencies and not material weaknesses.

• There was a control weakness in the human resource area. Bizarre concluded that it represented a significant deficiency. Dope disagreed and believed it represented a material weakness. Bizarre pulled rank and officially classified this weakness as a significant deficiency.

• Bizarre concluded that a fraud brainstorming meeting was unnecessary as he believed that Edex contained no fraud risks. Dope concurred in this conclusion, and they both signed off on a memo to the workpapers documenting this decision.

• The engagement team determined using non-statistical sampling methodology that they would have to select a sample of 100 customers to be circularized to verify the existence of accounts receivable balances. The accounts receivable consists of approximately 16,000 customers. Approximately 300 customer balances are in excess of $50,000 each, and approximately 9,000 balances are each below $500. The remainder of the balances are between $500 and $50,000.

Dollar values attributable to each group are approximately as follows:

Over $50,000 $90,000,000

$500 - 50,000 32,000,000

Under $500 4,000,000

$126,000,000

The auditors concluded that they would only verify material balances, and they selected for confirmation 100% of their sample from those accounts whose balances were over $50,000.

• Matt Dummy, Jr. was the senior auditor entrusted with the responsibility of overseeing the customer confirmation process, including mailing the confirmation requests. Matt was running late for his date with Suzie Jacuzzi on the evening that the confirmation requests were to be mailed. Yma Crook, Niles Accounts receivable supervisor, offered to mail the confirmation requests on Matts behalf. Matt readily agreed and was very happy to be able to meet Suzie on time.

• 63 of the accounts receivable responded to C&Bs confirmation request on the first mailing. C&B sent second requests to the 37 customers who did not respond. 33 customers responded to the second request. All 96 customers who responded to the confirmation requests acknowledged the indebtedness to Nile and confirmed as correct the balances due at year end. The auditors could not obtain any confirmation from the remaining four. Bizarre concluded that no additional work was necessary given the results of the confirmation procedures relating to the 96 customers who responded. Dope concurred.

• WT Gross was Niles largest customer, and Gross owed Nile approximately $14,000,000 as of December 31. In January of the next year it was announced that Gross was insolvent, Niles reserve for uncollectible amounts was approximately $5,000,000 at December 31. Niles position was that this event was related to the subsequent year and that it merely should be disclosed in the December 31 financial statements and that no loss should be recognized in that years financial statements. Bizarre and Dope concurred.

• In December of the year under Audit, Nile was served with a lawsuit claiming damages for environmental offenses which occurred during a twenty-five year period. Damages of $1 Trillion were claimed. Tony Baloney performed a review of this matter, and he concluded that it was too early to tell if Nile would have any liability in this matter. Because of Baloneys too early to tell conclusion, Nile concluded that this matter had no financial statement impact for that year. Bizarre and Dope concurred.

• The warehouse manager of Niles Altoona, PA warehouse resigned in December, leaving in his wake a mass of organizational chaos. Bonehead directed C&B not to perform any audit procedures at this location. The Altoona warehouse holds approximately 20% of Niles inventory. Bizarre and Dope agreed.

Required

• discuss what the issues are.
  • Note what the auditing and governance issues are, discuss why they are issues.
  • Point to specific sections of authoritative literature in discussing the issues.
  • Discuss what the proper procedures would be.