Common Law Responsibility for Errors and Fraud. Huffman & Whitman (H&W), a large regional accounting firm, was engaged by Ritter Tire Wholesale Company to audit its financial statements for the year ended January 31. H&W had a busy audit engagement schedule from December 31 through April 1 and decided to audit Ritter’s purchase vouchers and related cash disbursements on a sample basis. The firm instructed staff members to select a random sample of 130 purchase transactions and gave directions about important deviations, including missing receiving reports. Boyd, the assistant in charge, completed the audit documentation, properly documenting the fact that 13 of the purchases in the sample had been recorded and paid without including the receiving report (required by stated internal control procedures) in the file of supporting documents. Whitman, the partner in direct charge of the audit, showed the findings to Lock, Ritter’s chief accountant. Lock appeared surprised but promised that the missing receiving reports would be inserted into the files before the audit was over. Whitman was satisfied, noted in the audit documentation that the problem had been solved, and did not say anything to Huffman about it.

Unfortunately, H&W did not discover the fact that Lock was involved in a fraudulent scheme in which he diverted shipments of tires to a warehouse leased in his name and sent the invoices to Ritter for payment. He then sold the tires for his own profit. Internal auditors discovered the scheme during a study of slow-moving inventory items. Ritter’s inventory was overstated by about $500,000 (20 percent), the amount Lock had diverted.

Required:

a. Do you believe H&W has any further audit responsibility with respect to the missing receiving reports? Explain.

b. Do you believe H&W failed to exercise the appropriate level of professional care? Why or why not?

Answer rating: 100% (QA)

a Yes HW has responsibility to perform further audit when they found missing receiving reports I... View the full answer