The Brothers Greenberg For decades, Jack Greenberg oversaw a successful wholesale meat company, a company that he eventually incorporated and named after himself.1 Jack Greenberg, Inc., marketed a variety of meat, cheese, and other food products along the Eastern Seaboard of the United States from its Philadelphia headquarters. Jack Greenberg's failing health in the early 1980s prompted him to place his two sons in charge of the company's day-to-day operations. After their father's death, the two brothers, Emanuel and Fred, became equal partners in the business. Emanuel assumed the title of company president, while Fred became the company's vice president. The two brothers and their mother made up the company's three-person board of directors.

Several other members of the Greenberg family also worked in the business.

Similar to many family-owned and -operated businesses, Jack Greenberg, Inc.

(JGI), did not place a heavy emphasis on internal control. Like their father, the two Greenberg brothers relied primarily upon their own intuition and the competence and integrity of their key subordinates to manage and control their company's operations.

By the mid-1980s, when the privately-owned business had annual sales measured in the tens of millions of dollars, Emanuel realized that JGI needed to develop a more formal accounting and control system. That realization convinced him to begin searching for a new company controller who had the expertise necessary to revamp JGI's outdated accounting function and to develop an appropriate network of internal controls for the growing company. In 1987, Emanuel hired Steve Cohn, a CPA and former auditor with Coopers & Lybrand, as JGI's controller. Cohn, who had extensive experience working with a variety of different inventory systems, immediately tackled the challenging assignment of creating a modern accounting and control system for JGI.

Among other changes, Cohn implemented new policies and procedures that provided for segregation of key responsibilities within JGI's transaction cycles. Cohn also integrated computer processing throughout most of JGI's operations, including the payroll, receivables, and payables modules of the company's accounting function.

One of the more important changes that Cohn implemented was developing an internal reporting system that produced monthly financial statements the Greenbergs could use to make more timely and informed decisions for their business. Cohn's new financial reporting system also allowed JGI to file more timely financial statements with the three banks that provided the bulk of the company's external financing. By the early 1990s, JGI typically had a minimum of $10 million in outstanding loans from those banks.

One area of JGI's operations that Cohn failed to modernize was the company's accounting and control procedures for prepaid inventory. Since the company's early days, imported meat products had accounted for a significant portion of JGI's annual sales. Because foreign suppliers required JGI to prepay for frozen meat items, the company maintained two inventory accounts: Prepaid Inventory and Merchandise Inventory. Prepayments for imported meat products were debited to the Prepaid Inventory account, while all other merchandise acquired by the company for resale was debited to the Merchandise Inventory account. Prepaid inventory typically accounted for 60 percent of JGI's total inventory and 40 percent of the company's total assets.
Long before Cohn became JGI's controller, Jack Greenberg had given his son Fred complete responsibility for the purchasing, accounting, control, and other decisions affecting the company's prepaid inventory. Following their father's death, the two brothers agreed that Fred would continue overseeing JGI's prepaid inventory. When Cohn attempted to restructure and computerize the accounting and control procedures for prepaid inventory, Fred refused to cooperate. Despite frequent and adamant pleas from Cohn over a period of several years, Emanuel refused to order his younger brother to cooperate with Cohn's modernization plan for JGI's accounting system.

Questions
1. Identify important audit risk factors common to family-owned businesses. How should auditors address these risk factors?
2. In your opinion, what primary audit objectives should Grant Thornton have established for JGI's (a) Prepaid Inventory account and (b) Merchandise Inventory account?
3. Assess Grant Thornton's decision to rely heavily on JGI's delivery receipts when auditing the company's prepaid inventory. More generally, compare and contrast the validity of audit evidence yielded by internally prepared versus externally prepared client documents.
4. Describe the general nature and purpose of a "walk-through" audit procedure.
Are such tests required by professional auditing standards?
5. Identify audit procedures, other than a walk-through test, that might have resulted in Grant Thornton discovering that Fred Greenberg was tampering with JGI's delivery receipts.
6. Once an audit firm has informed client management of important internal control weaknesses, what further responsibility, if any, does the audit firm have regarding those items? For example, does the audit firm have a responsibility to insist that client management correct the deficiencies or address them in some other way?