Revenue & Misrepresentation by Clients Characters: Rachel Hanson, Senior in CPA firm Jim Thompson, Owner/manager of Fashion Line Sharon, part-time bookkeeper of Fashion Line In addition to the usual mix of compilation, review and audit clients for which Rachel Hunt serves as a senior in a small office of a regional CPA firm, she has been assigned a new client that recently engaged the firm. Fashion Line, an incorporated retail outlet, is a thriving local store. The business is run by a single owner/manager, Jim Thompson, who makes all major decisions. The business has not previously used the services of a CPA firm. In addition to preparation of financial statements, the CPA firm will handle tax returns for the business. At her Line visit to the client’s office, Rachel is introduced to Sharon, the part-time bookkeeper who is also a full-time accounting student at the local university. At a subsequent meeting, Sharon confides to Rachel that she found the job at the beginning of the semester after an extensive search. Sharon really needs the money to help finance her education, and feels lucky to have found a good-paying job during the current economic downturn. Feeling that Rachel is someone she can talk to and get advice from, Sharon describes a situation that has been on her mind for some time now. Sharon’s concern relates to the handling of sales revenues. When monies from sales revenues are counted and deposited on a weekly basis, a chart is filled out with categories carefully delineating the type of payment: cash, checks, American Express, or Visa/Mastercard. Sharon’s employer, after depositing the weekly total, brings this chart back with his own written-in total of the actual amount deposited. After looking over some of these weekly deposit chats, Sharon noticed that $500 cash was missing from each deposit. After a more thorough inspection of monthly tax documents that Jim Thompson has filled out, Sharon noticed that the reported monthly gross revenue was $2,000 less than what had been actually counted. The employer is the only person handling the money after it has been counted. He is also the only one to deposit the money. When Sharon asked Mr. Thompson about revenue not being reported for tax purposes, he assured her that every dollar of income was reported on the tax forms. Furthermore, Jim asserted, since Sharon wasn’t the person who signed the forms, she shouldn’t be concerned.

1) What is the situation and the accounting issue(s) 

2) Describe at least one ethical principle from the AICPA Code of Conduct and at least one accounting code rule (e.g. independence, integrity, confidentiality, acts discreditable, etc.) that should be considered when analyzing the case?

3) What are your recommendations for the people involved?