Case 1

a.

Since Antonio deliberately diverted the shipments to a warehouse leased in his

name and then sold the ties for his own profits, his activity is considered fraud or an
irregularity. Specifically, it is a misappropriation of assets, inventory in particular,
because it can be considered as theft of the entitys assets perpetrated by one of its
employees.

b.

No, there were no related party transactions involved as nothing stated in the case
suits the definition of related party transactions (PSA 550).

c.

Yes, a weakness in internal control exists with regard to the 30 missing receiving
reports because the internal auditor was not able to detect right away the irregularity in the
operations. It did not function timely enough to discover the fraud before it got worse.
Since there exists a weakness in internal control, Brava and Campos have the
responsibility of reporting it to the management and/or anyone authorized.

d.

Yes, the audit was conducted in a negligent manner. Campo got satisfied when
Antonio promised that the missing reports would be inserted into the files before the audit
was over. He made no proper follow up auditing procedures after his meeting with
Antonio. He should have reviewed the reports made by Antonio after that incident, and
should have compared purchases to inventory records.

Case 2
a.

Given the fact that Nicolas has expressed an unqualified opinion when clearly he
should not, this makes him liable to the bank. There was a material misstatement of fact
and knowledge of falsity of fraudulent financial reporting made by Jupiter Manufacturing
Corporation (through the letter and confirmation of the president about such irregularity).
The bank also relied on the false statement which results to damage to the bank.

b.

No, because the lessor is aware of the secret agreement. In fact, he (lessor) was a
party to the secret agreement. The lessor cannot recover anything from Nicolas including
uncollected rent. He cannot also assert reliance on financial statements because he wasnt
innocent about the fraudulent activity.

c.

Independence requires integrity and an objective approach to the audit

process. Obviously, Nicolas had no integrity as an auditor which means that he has not

become independent in the auditing engagement. An independent auditor must carry out
his or her work freely and in an objective manner. Nicolas was driven by pressure by the
president which led him to do such fraudulent action. The president said that if Nicolas did
not issue his report by September 30, Jupiter would sue Nicolas for substantial damages
that would result from not getting the loan. Because of this pressure, Nicolas was forced to
issue an unqualified opinion about the financial statements. This action by the
management impairs auditors independence as supported by the fact stated on ethics
interpretation on actual or threatened litigation:
An expressed intention by the present management to commence litigation
against the auditor alleging deficiencies in audit work for the client is considered to impair
independence if the auditor concludes that there is a strong possibility that such a claim
will be filed.
He might also be subject to disciplinary action by the professional organization or
regulatory body.