Question
Trevor Hoots & Matthew Smith are the partners of TM Associates, a medium-sized accounting firm. TM Associates wereengaged to audit Ginger Supply Company Ltd.Throughout the
Trevor Hoots & Matthew Smith are the partners of TM Associates, a medium-sized accounting firm. TM Associates wereengaged to audit Ginger Supply Company Ltd.Throughout the audit, Hoots spent most of histime in the field planning the audit, supervising the staff and reviewing their work. A significant part of the audit entailed verifying the physical count, cost and summarisation of inventory. Inventory was highly significant to the financial statements, and Hoots knew that the inventory was pledged as collateral to the National Bank for a largeloan. In reviewing Ginger's inventory count procedures, Hootstold the managing director that he believed the method of counting inventory at different locations on different days was highly undesirable. The managing director stated that it was impractical to count all inventory on the same day because of personnel shortages and customer preference. After considerable discussion, Hoots agreed to permit the practice if the managing director would sign a statement that no other method was practical. The audit firm had one person at each site to audit the inventory count procedures and actual count. There were 17 locations. Eighteen months later, Hoots learned that the worst had happened. Management below the managing director's level had conspired to materially overstate inventory as a means of covering up obsolete inventory and inventory losses due to mismanagement. The misstatement had occurred by physically transporting inventory at night to other locations after it had been counted in a given location so it could be counted again to show a higher inventory count and value. The accounting records were inadequate to uncover these illegal transfers. Both GingerSupply Company Ltd and the National Bank sued TrevorHoots& Matthew Smith.
in this situation what defence should Hoots& Smith use in the action by the National Bank?
this is my presentation question but i have no idea for this question, could you help me solve this question?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered 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