Question

Total Fresh Products manufactures and distributes snack foods. Total Fresh Products is being audited for the first time by Rachel Fancy, a partner in a local CPA firm. Early in the audit, Rachel uncovered that the CEO had acquired a home media system, a Mercedes Benz, and an exercise pool for his personal use. These items were delivered to the CEO’s home, and they were recorded in the accounting records as professional services. On Total Fresh Products’ most recent federal tax return, the items were included in deductible business expenses. Write responses to the following:

1) What should Rachel Fancy do with the information she has uncovered?

2) What impact should the discovery have on how she proceeds with the audit?

3) How should the findings be reflected in her audit opinion report?

Answer 1

1. She should report about the relevant tax laws and the wrong treatment fo the management.

2. This may not have much impact as she has discovered the irregularity and given the information about the same to the management. Though she may look for more such transactions.

3. Findings should be given in the Basis for Qualified Opinion section of the report.