Write a reflection paper answering the questions at the end of this assignment.:
What Ever Happened to those Credit Slips?
Tim Johnson, CPA, is the senior in-charge on an audit of medium sized ($20 million in assets) client, Dalton Enterprises, Inc. This client is a family owned and operated corporation. Mr. William Dalton (67 years old) is the President who micro-manages all aspects of the business except the finance area, which he leaves entirely to his son, Chauncey. The newly appointed Vice President of Finance, Chauncey Dalton recently graduated with an MBA with technical specialization in Finance. Chauncey is responsible for administering all the financial and accounting aspects of the business including the appointment of the auditors. Chauncey replaces Herb Castle who retired after 30 years with the organization. George Smith is the Controller, and reports directly to Chauncey.
The annual audit report has never been circulated outside of the organization. The audit report provides a basis for the tax return which George prepares. The audit report also provides Mr. Dalton with supplemental schedules including comparative aging schedules and a detail comparative listing along with the changes in all General Ledger accounts. Mr. Dalton used the audit report along with the management letter, for administrative control purposes.
While analyzing the Travel & Entertainment expenses, which were substantially higher ($20,000) than in last year’s amount, Tim Johnson, CPA, noted that most of the $20,000 increase was attributable to payments made on Chauncey’s behalf. The supporting documentation for these expenditures was very sketchy or missing and in most cases, the only documentation was a check request initiated by Chauncey.
All other Travel & Entertainment expenditures, including the modest payments on Mr. Dalton’s behalf, were properly documented. When queried about this documentation problem, George Smith stated that the company’s policy requires approval from the immediate supervisor of the person requesting the payment for Travel & Entertainment expenditures. George acknowledged that the policy was circumvented for these $20,000 expenses. But considering the circumstances, George was not concerned about the problem. When asked about a $25,000 travel advance due from Chauncey, George replied, “Chauncey signed your confirmation request form and acknowledged that he owe the $25,000 due, didn’t he?
Tim Johnson, CPA, decided to discuss the problem of lack of approvals and documentation with Chauncey. Chauncey’s response was to question why the auditors would be skeptical of his honestly and motives here. Chauncey also stated that it was typical of “bean counters” to pursue areas that are of little significance, while ignoring areas where efficiency could be improved. Chauncey ended the interview by asking “What are we paying you guys for anyhow?”
All other audit areas and financial statement disclosures are deemed satisfactory.
Questions:
1. What are the relevant facts of this case?
2. What are the ethical issues?
3. Name at least 2 alternative scenarios that Tim Johnson, CPA, can do in this situation. What are the possible consequences of each scenario?
