Cardillo Travel Systems Case Study Assignment Instructions
Write a four to five (4-5) page paper in which you:
1. Explain the Securities and Exchange Commission’s rationale to charge Cardillo executives with each of the following violations:
- making false representations to outside auditors
- failing to maintain accurate financial records
- failing to file prompt financial reports with the SEC
- violating the insider trading provisions of the federal securities laws
2. Determine who was in violation or compliance of the AICPA’s Code of Professional Conduct in this case study and analyze the key reasons why they were or were not in compliance. Provide support for the rationale.
3. Analyze the actions taken by Cardillo’s outside auditors and evaluate the level of efficiency of the audit risk management in this case study. Provide support for the rationale.
4. Determine whether or not the five (5) components of internal control were being followed. Support the response with at least two (2) examples.
5. Create an argument for or against whether auditors have a responsibility to assess the judgment of the decisions made by Cardillo’s management. Support the argument.
6. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and similar type Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
- Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
- Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
- Analyze the process and regulatory requirements for professional ethical decision making.
- Analyze the critical factors of business, audit, and planning risks, and the process of managing these risks in audit engagements.
- Analyze an audit framework and assessment process for evaluating the effectiveness of internal controls related to financial reporting.
- Use technology and information resources to research issues in auditing.
- Write clearly and concisely about auditing using proper writing mechanics.
Cardillo Travel systems Inc
Cardillo travel systems are an organization that was established way back in the year 1935 but was later sold to one entrepreneur by the name Arnold Walter who purchased it in the year 1956. Under the management of Arnold, Cardillo became one of the fourthlargest run travel agencies to have ever existed in the industry. Moreover, the new management worked so hard to an extent of making the company gets listed in the national stock exchange for the first time ever in the history of travel agencies. During the early 1980s, the company was able to grow massively due to the great amount of financial gains it made from the revenues that it generated. The growth in revenues was particularly enabled by the well calculated strategy in franchising. In as much as the company was able to make great strides in terms of the financial growth, all did not go down well with the company since it was involved in a number of fraud cases. Such cases finally led to the tarnishing of the good name that the company may have created in the previous years.
HelenShepherd who was the external auditor hired by Cardillo was able to realize that the company had made a suspicious entry in one of the transaction that the company had undertaken with United Airlines. As an external auditor that was in charge of the supervisions of the auditing process, she had to question the move in order to establish whether it was an error or a mistake that was done deliberately. Helen was informed that the entry was done as an adjustment to the recoveries that the company had made in a transaction in the middle of 1985. The transaction entry was such that the expense payment of the company had been recorded as an overstatement of the revenues. The funds had therefore been recorded as revenues and such recordings were done in the wrong period. The main objective that the management of the company was tries and maintains the stockholders equity within a certain amount.
The exchange and securities commission charged Cardillo with a number of violations a result of the transactions that the company had chosen to undertake. One of the charges that were imposed on the company was as a result of giving false representations to the external auditors who were carrying out that process. It is obvious that the executives of the company had made false representations of their financial figures that were mainly targeted at fooling the auditors. Such false misrepresentations are normally considered to be against the SEC rules especially when it comes to issuing reports by the management. Additionally, the rules clearly state that the management is supposed to take control over the internal financial reporting procedures. When the management is involved in the process then it gives the internal and external auditors the assurance that the work they undertake can be relied upon. Additionally, the management is supposed to undertake the role of ensuring that the financial statements are prepared according to the GAAP rules. If such rules are not followed then it becomes difficult for the external auditors to use such financial data.
Failing to maintain accurate financial record
The company, through its executives and the accountants decided to engage in fraud in order to give false information to the public. The financial records that were maintained by the accounting departments were absolutely inaccurate and also went against the ethics and integrity required in financial reporting. The main intention of the company was to give the public an impression that the organization was doing so well in terms of financial performance. As a result of that, the company decided to inflate the figures so that the value of the stock equity would always be above three million dollars. According to the Securities and Exchange Commission, the act of raising the stock equity value to give false impressions about the company’sfinancial performance amounted to fraud. The act chosen by the company violated the company’s rules and provisions that requirescompanies to be accurate when it comes to recording and keeping of their financial books. The rules of the commission requires companies to keep their books, record every transaction and accurately give the financial figures that shows how every transaction was conducted. Since the executives at Cardillo were not able to meet any of the above rules and regulations, they were therefore subjected to the SEC charges.
The commission was also right to charge the company’sexecutives for failing to promptly file their transactions with the SEC. The company was charged a penalty of six hundred and eighty five thousand dollars but the recordings of such penalties were nowhere to be seen in the financial records of the company. As a result of the failure to make such recording s of the transactions, the company was liable and subject to being punished since they had violated the law. The exchange could as well have the moral authority to revoke the registration of the company based on the late or possibly failure to file the penalties and other losses made by a company.
Violating insider trading provisions of the federal securities
As a result of the civil suit that the company had faced as a result of its dubious business operations, the company made a number of huge losses. But since the company was already in the fraud business, they did not want their stakeholders to be aware of such losses. The company, through its management decided to engage in the business of selling the stocks as a way of covering up the losses that the company had made.
Insider trading violations
There were individuals who conformed to the AICPA’s professional code of conduct. One of the individuals who conformed to such conducts was Russell who by then was the controller. The other two individuals who also conformed to the code were HelenShepherd and Roger Shlonsky. The manner in which the mentioned individuals carried out their mandate showed an [proved that they indeed conformed to the professional code of conduct. It must be known that the management of the company tried to lure Smith into signing the misrepresented financial details but the latter refused to abide by such requirements. His professional judgment about the matter could not allow him to give his signature, knowing very well that the company was getting him in a fix. B refusing the sign the misrepresented figures, Smith was able to reveal the true nature of the United Airlines as opposed to what they made other people to believe. His actions and adamant nature in refusing to sign the corrupt papers was in accordance to the commissions rule number 102.
Helenshepherd on her part questioned the transactions that were recorded for the deal between Cardillo and United Airlines. According to her, the nature of the recordings did not match the nature of the transactions that were carried out by the company. In as much as she knew that her inquisitive behavior may have to cost her clients, she went ahead and did what was right. According to the commission’s rules, Helens acts were in accordance to the company’s objectivity rule number 102. Additionally, her efforts were also in accordance to the general accounting standards and rule number 201.
Roger Shlonsky was also another individual whose act was in accordance to the rules and code of professional act. He openly disagreed with the management regarding the transactions and the nature of explanations that the company had given for the dubious financial transactions.
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