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Case-Ethical issues in auditing

John, a young CPA and one of the audit team members for the Moulberg Electrical Appliances Ltd, has developed very good insights into company’s systems in last 12 months and was asked by his partner, Chandler, to draft the report on reliability of the internal control at Moulberg for review. The report is to be used as the part of a due diligence assurance engagement for Moulberg’s prospectus. Moulberg wishes to be listed on the Australian Securities Exchange by next June.

In performing the review, John finds number of matters which concern him. He notices that controls over inventory requisitions are very poor, leading to numerous complaints from customers about delays and wrong deliveries, and cancellations. Furthermore, inventory records don’t show history or values of the inventory, so that estimates were used to arrive at year-end inventory. He also noticed poor standard of the appliances, with manufacturers’ warranties long expired.
John finishes his report, with details of poor internal controls for his partner’s review. Though, his partner replaces his report with the very short summary, and a conclusion that internal control systems are sound and reliable.

John makes an appointment to see Chandler, but is worried as to how he must approach him about Moulberg Electrical Appliances’ issues.

Required

Discuss the professional and ethical issues faced by John and give an analysis that can help him deal with the matter with Chandler.

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