Complete Case
6.5- Avis Love, Staff Accountant from the case book.
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This case is based upon an actual series of events. Names and
certain background information have been changed to conceal the identities of
the individuals involved in the case.
CASE 6.5: Avis Love,
Staff Accountant
âOh no, not Store 51,â Avis Love moaned under her breath. For
the third time, Avis compared the dates listed in the cash receipts journal
with the corresponding dates on the bank deposit slips. Avis shook her head
softly and leaned back in her chair. There was no doubt in her mind now. Mo
Rappelle had definitely held open Store 51’s cash receipts journal at the end
of October..vitalsource.com/books/9781337003100/content/id/N583″>1
Avis Love was a staff accountant with the
Atlanta office of a large international accounting firm. Several months
earlier, Avis had graduated with an accounting degree from the University of
Alabama at Birmingham. Although she did not plan to pursue a career in public
accounting, Avis had accepted one of the several job offers she received from
major accounting firms. The 22-year-old wanted to take a two- or three-year
âvacationâ from college, while at the same time accumulating a bankroll to
finance three years of law school. Avis intended to practice law with a major
firm for a few years and then return to her hometown in eastern Alabama and set
up her own practice.
For the past few weeks, Avis had been assigned
to the audit engagement for Lowell, Inc., a public company that operated nearly
100 retail sporting goods stores scattered across the South. Avis was nearing
completion of a year-end cash receipts cutoff test for a sample of 20 Lowell
stores. The audit procedures she had performed included preparing a list of the
cash receipts reported in each of those stores’ accounting records during the
last five days of Lowell’s fiscal year, which ended 31 October. She had then
obtained the relevant bank statements for each of the stores to determine whether
the cash receipts had been deposited on a timely basis. For three of the stores
in her sample, the deposit dates for the cash receipts ranged from three to
seven days following the dates the receipts had been entered in the cash
receipts journal. The individual store managers had apparently backdated cash
receipts for the first several days of the new fiscal year, making it appear
that the receipts had occurred in the fiscal year under audit by Avis’s firm.
Avis had quickly realized that the objective
of the store managers was not to overstate their units’ year-end cash balances.
Instead, the managers intended to inflate their recorded sales. Before Avis
began the cutoff test, Teddy Tankersley, the senior assigned to the Lowell
audit and Avis’s immediate superior, had advised her that there was a
higher-than-normal risk of cash receipts and sales cutoff errors for Lowell
this year. The end of Lowell’s fiscal year coincided with the end of a
three-month sales promotion. This campaign to boost Lowell’s sagging sales
included bonuses for store managers who exceeded their quarterly sales quota.
This was the first time that Lowell had run such a campaign and it was a modest
success. Fourth-quarter sales for the fiscal year just ended topped the
corresponding sales for the previous fiscal year by 6 percent.
When Avis uncovered the first instance of
backdated cash receipts, she had felt a noticeable surge of excitement. In
several months of tracing down invoices and receiving reports, ticking and
tying, and performing other mundane tests, the young accountant had
occasionally found isolated errors in client accounting records. But this was
different. This was fraud.
Avis had a much different reaction when she
uncovered the second case of backdated cash receipts. She had suddenly realized
that the results of her cutoff test would have âreal worldâ implications for
several parties, principally the store managers involved in the scheme. During
the past few months, Avis had visited six of Lowell’s retail stores to perform
various interim tests of controls and to observe physical inventory procedures.
The typical store manager was in his or her early 30s, married, with one or two
small children. Because of Lowell’s miserly pay scale, the stores were
chronically understaffed, meaning that the store managers worked extremely long
hours to earn their modest salaries.
No doubt, the store managers who backdated
sales to increase their bonuses would be fired immediately. Clay Shamblin,
Lowell’s chief executive officer (CEO), was a hard-nosed businessman known for
his punctuality, honesty, and work ethic. Shamblin exhibited little patience
with subordinates who did not display those same traits.
When Avis came to the last store in her
sample, she had hesitated. She realized that Mo Rappelle managed Store 51.
Three weeks earlier, Avis had spent a long Saturday afternoon observing the
physical inventory at Store 51 on the outskirts of Atlanta. Although the Lowell
store managers were generally courteous and accommodating, Mo had gone out of
his way to help Avis complete her tasks. Mo allowed Avis to use his own desk in
the store’s cramped office, shared a pizza with her during an afternoon break,
and introduced her to his wife and two small children who dropped by the store
during the afternoon.
âMo, what a stupid thing to do,â Avis thought
after reviewing the workpapers for the cutoff tests a final time. âAnd for just
a few extra dollars.â Mo had apparently backdated cash receipts for only the
first two days of the new year. According to Avis’s calculations, the backdated
sales had increased Mo’s year-end bonus by slightly more than $100. From the
standpoint of Lowell, Inc., the backdated sales for Mo’s store clearly had an
immaterial impact on the company’s operating results for the year just ended.
After putting away the workpapers for the
cutoff test, a thought dawned on Avis. The Lowell audit program required her to
perform cash receipts cutoff tests for 20 stores ⦠any 20 stores she selected.
Why not just drop Store 51 from her sample and replace it with Store 52 or 53
or whatever?
EPILOGUE
Avis brooded over the
results of her cutoff test the remainder of that day at work and most of that
evening. The following day, she gave the workpaper file to Teddy Tankersley.
Avis reluctantly told Teddy about the backdated cash receipts and sales she had
discovered in three stores: Store 12, Store 24, and Store 51. Teddy
congratulated Avis on her thorough work and told her that Clay Shamblin would
be very interested in her findings.
A few
days later, Shamblin called Avis into his office and thanked her for uncovering
the backdated transactions. The CEO told her that the company’s internal
auditors had tested the year-end cash receipts and sales cutoff for the remaining
72 stores and identified seven additional store managers who had tampered with
their accounting records. As Avis was leaving the CEO’s office, he thanked her
once more and assured her that the store managers involved in the scam âwould
soon be looking for a new line of work ⦠in another part of the country.â
Questions
·
1. Would it have
been appropriate for Avis to substitute another store for Store 51 after she
discovered the cutoff errors in that store’s accounting records? Defend your
answer.
·
2. Identify the parties
potentially affected by the outcome of the ethical dilemma faced by Avis Love.
What obligation, if any, did Avis have to each of these parties?
·
3. Does the
AICPA’s Code of Professional Conduct prohibit auditors from
developing friendships with client personnel? If not, what measures can
auditors take to prevent such friendships from interfering with the performance
of their professional responsibilities?
·
4. Identify the key
audit objectives associated with year-end cash receipts and sales cutoff tests.
·
5. What method would
you have recommended that Avis or her colleagues use in deciding whether the
cutoff errors she discovered had a material impact on Lowell’s year-end
financial statements? Identify the factors or benchmarks that should have been
considered in making this decision.
