4 You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. Y

Question

4 You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made

responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several

matters came to light during your most recent review of client invoice files:

Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect

of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states

that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information

in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended

28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued

imminently.

Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices

relating to the recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you

notice an invoice received by your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager

responsible for the audit of Wallace Co. The invoice relates to the rental of an area in Wallace Co’s empty warehouse,

with the following comment handwritten on the invoice: ‘rental space being used for storage of Ms Hobson’s

speedboat for six months – she is our auditor, so only charge a nominal sum of $100’. When asked about the invoice,

Valerie Hobson said that the invoice should have been sent to her private address. You are aware that Wallace Co

sometimes uses the empty warehouse for rental income, though this is not the main trading income of the company.

In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a

client of your firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply

Co to several audit clients regarding the supply of bespoke accounting software’.

Required:

Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend

what action, if any, Smith & Co should now take in respect of:

(a) Norman Co; (8 marks)

Answer 1

正确答案：
4 Smith & Co
(a) Norman Co
The invoice is 12 months old and it appears doubtful whether the amount outstanding is recoverable. The fact that such an
old debt is unsettled indicates poor credit control by Smith & Co. Part of good practice management is to run a profitable,
cash generating audit function. The debt should not have been left outstanding for such a long period. It seems that little has
been done to secure payment since the file note was attached to the invoice in November 2007.
There is also a significant ethical issue raised. Overdue fees are a threat to objectivity and independence. Due to Norman Co
not yet paying for the 2007 year end audit, it could be perceived that the audit has been performed for free. Alternatively the
amount outstanding could be perceived as a loan to the client, creating a self-interest threat to independence.
The audit work for the year ended 28 February 2008 should not have been carried out without some investigation into the
unpaid invoice relating to the prior year audit. This also represents a self-interest threat – if fees are not collected before the
audit report is issued, an unmodified report could be seen as enhancing the prospect of securing payment. It seems that a
check has not been made to see if the prior year fee has been paid prior to the audit commencing.
It is also concerning that the audit report for the 2008 year end is about to be issued, but no invoice has been raised relating
to the work performed. To maximise cash inflow, the audit firm should invoice the client as soon as possible for work
performed.
Norman Co appears to be suffering financial distress. In this case there is a valid commercial reason why payment has not
been made – the client simply lacks cash. While this fact does not eliminate the problems noted above, it means that the
auditors can continue so long as adequate ethical safeguards are put in place, and after the monetary significance of the
amount outstanding has been evaluated.
It should also be considered whether Norman Co’s financial situation casts any doubt over the going concern of the company.
Continued cash flow problems are certainly a financial indicator of going concern problems, and if the company does not
resolve the cash flow problem then it may be unable to continue in operational existence.
Action to be taken:
– Discuss with the audit committee (if any) or those charged with governance of Norman Co:
The ethical problems raised by the non-payment of invoices, and a payment programme to secure cash payment in
stages if necessary, rather than demanding the total amount outstanding immediately.
– Notify the ethics partner of Smith & Co of the situation – the ethics partner should evaluate the ethical threat posed by
the situation and document the decision to continue to act for Norman Co.
– The documentation should include an evaluation of the monetary significance of the amount outstanding, as it will be
more difficult to justify the continuance of the audit appointment if the amount is significant.
– The ethics partner should ensure that a firm-wide policy is communicated to all audit managers requiring them to check
the payment of previous invoices before commencing new client work. This check should be documented.
– Consider an independent partner review of the working papers prepared for the 28 February 2008 audit.
– The audit working papers on going concern should be reviewed to ensure that sufficient evidence has been gathered to
support the audit opinion. Further procedures may be found to be necessary given the continued cash flow problems.
– Smith & Co have already acted to improve credit control by making a manager responsible for reviewing invoices and
monitoring subsequent cash collection. It is important that credit control procedures are quickly put into place to prevent
similar situations arising.