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Hide-It (HI)

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Hide-It (HI), a family-owned business based in Tombstone, Arizona, builds custom homes;with special features, such as hidden rooms and hidden wall safes. Hide-It has been an audit;client for three years.;You are about to sign off on a ?clean? opinion on HI?s current annual fi nancial statements;when Art Hyde, the VP-Finance, calls to tell you that the Arizona Department of Revenue;has seized control of a Hide-It bank account that includes about $450,000 of company funds;the account is not currently recorded in the accounting system and you had been unaware of;it. In response to your questions about the origin of the funds, Art assures you that the funds;though not recorded as revenue, had been obtained legitimately. He explains that all of the;money came from separately billed but unrecorded change orders to items in contracts completed;before you became HI?s auditor, and before he or any members of current management;became involved with the company. You subsequently determine that there is insuffi cient evidence;to allow you to reconstruct the nature of these cash transactions, although the following;analysis is available from the Arizona Department of Revenue;Deposits 1/17/X2?12/3/X4 $455,000;Interest earned 1/2/X2?12/31/X8 95,000;Withdrawals 2/12/X3?4/7/X7 (100,000);Balance 12/31/X8 $450,000;Art also informs you that HI has agreed to pay a combined tax and penalty of 12 percent on;the total funds deposited within 120 days as required by a recently enacted rule that provides;amnesty for tax evaders. Furthermore, he states that negotiations with the Internal Revenue;Service are in process.;a. The professional standards defi ne errors as unintentional misstatements or omissions of;amounts or disclosures in the fi nancial statements. Is the situation described an error?;b. The professional standards state that fraud relates to intentional misstatements or omissions;of amounts or disclosures in the fi nancial statements. Misstatements due to fraud;may occur due to either (a) fraudulent fi nancial reporting or (b) misappropriation of assets.;Does the situation appear to be fraud? If so, is it fraudulent fi nancial reporting, misappropriation;of assets, or both?;c. The professional standards outline certain auditor responsibilities relating to identifying client noncompliance with laws and distinguish between laws with a ?direct eff ect? on;the fi nancial statements and other laws. Does the situation herein relate to noncompliance;with laws as discussed within the auditing standards? If so, is the noncompliance related to;a law with a direct eff ect on the fi nancial statements or another law.;d. Should the CPA fi rm resign in this situation? If the decision is not clear-cut, what additional;information would you desire before deciding?

 

Paper#35637 | Written in 18-Jul-2015

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