Audit Case

September 27, 2012

Dear Audit Partner,

I have just completed my tour of Clean & Dry to gain more knowledge on them as our client. I am writing to you today to provide you with a few of my concerns and what I believe our best course of action is.

While analyzing their financial statements I noticed that although their revenue remained constant to prior years their Net Income for this year was up as much as 30%. Furthermore, I also notice that their waste disposal costs are considerably lower than last years. Concerned of the possibility of this misstatement I approached the Accounts Payable Manager and they walked me through the cost per drum and how much water goes in each. From this information gathered I estimated that they had only expensed 2 months of disposal costs for the entire year. This a concern to us because there is only one reader of their financial statement and that is Bob Clarke who owns 100% of the company. He is primarily concerned with the company’s Net Income so this is within our materiality base

I then went to speak to Sammy Chu the companies COO about my findings and this is where my next concern arose. His response to my findings was “Why are you asking so many questions? This is not an environmental audit so you do not have to worry about any of that.” My concern is that there is a lack of management integrity present as Sammy was very defensive when I ask him about the disposal expenses.

Before we continue with this audit I recommend that we first consider the possibility of financial statement fraud present in Clean and Dry.  Using the fraud triangle, I have outlined the following

• Opportunities: As Sammy see all of operations he has access to the necessary files to perpetrate fraud. He also can put pressure on the accounts payable manager to cooperate with him.
• Attitude: As I stated above when I questioned Sammy about the lower expenses he was very defensive
• Incentives: From this tour I was not able to obtain any information to provide an incentive

I recommend that we need to learn more about this company before we continue with this audit. Specifically, the following:

• Does Sammy receive a bonus based on Net Income?
• Is there a going concern issue within the company?
• Do they have any profit requirements they need to hit?

If any or all of these are present than we will need to request all the necessary documents from the Accounts Payable Manager inorder to assure ourselves if this is a material misstatement due to fraud or simply just an error

Regards

Ryan Cullis

Audit Associate