Case 5.1 (Cardillo Travel Systems)

CASE 5.1
CARDILLO TRAVEL SYSTEMS, INC.

Questions:

1. Identify the accountants in this case who faced ethical dilemmas. Also identify the parties who would be potentially affected by the outcome of each of these dilemmas. What responsibility did each accountant owe to these parties? Did the accountants fulfill these responsibilities?

2. Describe the procedures an auditor should perform during a review of a client’s quarterly financial statements. In your opinion, did the Touche Ross auditors who discovered the $203,000 adjusting entry during their 1985 second-quarter review take all appropriate steps to corroborate that entry? Should the auditors have immediately informed the audit partner, Helen Shepherd, of the entry?

3. In reviewing the United Airlines–Cardillo agreement, Shepherd collected evidence that supported the $203,000 adjusting entry as booked and evidence that suggested the entry was recorded improperly. Identify each of these items of evidence. What characteristics of audit evidence do the profession’s technical standards suggest auditors should consider? Analyze the audit evidence that Shepherd collected regarding the disputed entry in terms of those characteristics.

4. What are the principal objectives of the SEC rule that requires Form 8-K statements to be filed when public companies change auditors? Did Shepherd violate the client confidentiality rule when she discussed the United Airlines–Cardillo transaction in the exhibit letter she filed with Cardillo’s 8-K auditor change statement? In your opinion, did Shepherd have a responsibility to disclose to Cardillo executives the information she intended to include in the exhibit letter?

5. Do the profession’s technical standards explicitly require auditors to evaluate the integrity of a prospective client’s key executives? Identify the specific measures auditors can use to assess the integrity of a prospective client’s executives.