You have been with ABC and Associates, CPAs for approximately three (3) months and are completing your work as a consultant on an internal audit engagement in Grand Fashion Sense Company. Grand Fashion Sense Company produces pullover knit shirts to address the business casual market for both men and women.
Although your experience has been limited, an unexpected staff resignation has resulted to working directly with the engagement’s in-charge senior on inventory. This has been a learning experience for you, as you have helped perform various test of controls which may be summarized as indicating that internal control over inventory (including the perpetual records) seems strong. It is your impression that those tests resulted in a decrease in substantive procedures, thereby allowing a particularly efficient audit.
At the beginning of the engagement, the in-charge senior told you that the management team of Grand Fashion Sense Company has been helpful and friendly. Throughout this engagement, you have found the situation to be as good as described. In fact, the company allows your team to purchase up to three (3) knit shirts at a particularly attractive price of P120 per shirt, the cost for which employees may purchase such shirts. The shirts have a market price of P500, although the direct labor and material costs of each shirt are only P100.
Near the conclusion of the engagement, after you and the other three staff members of your team paid the in-charge senior and told him your respective sizes, he walked to the warehouse, removed 12 shirts from the appropriate piles and brought them out.
That evening, you gave the situation some thought. On the one hand, the company did not lose any money on your purchase of the shirts. But, on the other hand, you would never have been able to purchase such high-quality clothes for such a low price.
1. As the company’s consultant, is it acceptable to purchase those shirts on that manner from your clients?
2. Discuss the effect of any information presented in the case on the adequacy of the consulting and internal audit engagement.
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