Jan Sharpe recently joined the public accounting firm of Spark, Watts, and Wilcox. On her third audit for the firm, Sharpe examined the underlying documentation of 200 disbursements as a test of purchasing, receiving, vouchers payable, and cash disbursement procedures. In the process, she found 12 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 audit supervisor. Relying on prior experience with the client, the audit supervisor disregarded Sharpe'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 $70 000, of which $50 000 was recovered after the completion of the audit.
REQUIRED
Discuss the legal implications and liabilities of Spark, Watts, and Wilcox as a result of the facts just described.