PA has been recently appointed auditor of Foible Ltd., a company that sells high cost knickknacks to third world countries. To facilitate the rapid preparation of the financial statements, management had the physical inventory counted in October, rather than at the December year end. During the inventory count, PA noticed that several of the boxes were labelled with receiving documents from a competitor. PA was told that the new warehouse supervisor worked part time at the competitor, and must have picked up the wrong boxes.
Several employees have sued Foible Ltd. for wrongful dismissal, claiming that they were promised a job that would last at least one year, with low cost accommodations as well. They are suing for the balance of the year's wages and claiming that they were brought into the country under false pretenses. These employees are all from an eastern European country. The law firm has responded in the legal letter that this suit is without merit.
During the year Foible obtained legal services from a firm in which the Chairman of the Board of the company is a partner. Fees and disbursements for these services for the year was $125,000, a material amount.
During the audit, employees often spoke in a foreign language among themselves before responding to PA, then one employee would respond after some often heated discussion.
Subsequent to the year end, the warehouse supervisor was arrested on criminal charges of theft, and Foible charged with selling stolen goods. PA was charged as an accomplice to money laundering, as all of the management for Foible were members of a criminal group laundering money from eastern Europe.
Required:
Discuss the actions that PA could have taken during the engagement to prevent these charges.
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