Reeves, a newly promoted Audit Supervisor, has recently accepted as a Chartered Accountant (CA) and one of the audit team members for Matrix Electrical Appliances Ltd (Matrix). He has developed very good insights into the company’s systems in the last 12 months and was asked by his partner, Hugo, to draft a report on the reliability of the internal control at Matrix for review. The report is to be used as a part of a due diligence assurance engagement for Matrix’s prospectus. Matrix wants to be listed on the Australian Securities Exchange by next June. In carrying out the review, Reeves finds a number of matters that concern him. He notices that the controls over inventory requisitions are very poor, leading to numerous complaints from customers about delays and wrong deliveries, and cancellations. Moreover, the inventory records do not show the history or the values of the inventory, so that estimates were used to arrive at the year-end inventory. He also noticed the poor standard of the appliances, with manufacturers’ warranties long expired. Reeves completes his report, with details of the poor internal controls for his partner’s review. However, his partner replaces his report with a very brief summary, and a conclusion that the internal control systems are sound and reliable. Reeves makes an appointment to see Hugo but is worried as to how he should approach him about Matrix Electrical Appliances’ issues.

Discuss and explain the professional and ethical issues faced by Reeves and provide an analysis, which can help him deal with the matter with Hugo.