Susan Harris is a new assistant auditor with the public accounting firm of Sparks, Watts, and Wilcox, CPA's. On her third audit assignment, Harris examined the documentation underlying 60 disbursements as a test of controls over purchasing, receiving, vouchers payable, and cash disbursement procedures. In the process, she found five disbursements for the purchase of materials with no receiving reports in the documentation. She noted the exceptions in her working papers and called them to the attention of the senior auditor. Relying on prior experience with the client, the senior auditor disregarded Harris's comments, and nothing further was done about the exceptions.

Subsequently, it was learned that one of the client's purchasing agents and a member of its accounting department were engaged in a fraudulent scheme whereby they diverted the receipt of materials to a public warehouse while sending the invoices to the client. When the client discovered the fraud, the conspirators had obtained approximately $700,000 - $500,000 of which was obtained after the completion of the audit.

Required

Discuss the legal implications and liabilities to Sparks, Watts, and Wilcox as a result of the above facts. (AICPA, adapted)