As with many of his audit staff counterparts across the country, Bill Turner spent the last day of the year performing inventory observation procedures. His assignment that December 31 included taking test measurements at a client’s grain elevator in a small prairie community. Bill had measured grain invento-ries on two previous audits and was the in-charge accountant on this audit.
Bill’s observations of the quantity of grain in the elevator fell ten percent below the client’s records. Bill’s attention was drawn to the discrepancy in the two measurements of what was in the elevator because, in his judgment, such a gap was significant enough to be material. The resulting difference between the inventory as reported by the client and the audited amount was enough to cause a significant drop in net income. Bill documented his findings in the working papers and proposed an adjusting entry for the difference.
Upon delving further into the matter, Bill determined that a discrepancy in the grain inventory had also surfaced two months previously. The quantity of grain, as reported by a government inspector at that time was also lower than that on the client’s records. The difference in the inventory valuation, however, was not as great as that in Bill’s tests. Still, no adjustment to the client’s records was made. This information was also documented in the working papers.
Prior to discussing the discrepancy with the client, Bill told Greg, the en-gagement partner, about the problem. Greg, who had substantial experience in the industry, advised Bill that this would be a sensitive issue with the client. He also pointed out that grain inventories are notoriously difficult to measure, with the potential for errors as large as ten percent. Greg promised that he would handle the matter personally and therefore told Bill not to discuss the discrep-ancy with the client. The partner kept the inventory working papers.
After completion of the field work, Bill returned to the office to wrap up his work on the engagement. The inventory working papers were still not in the file. Upon Bill’s inquiry, the partner handed him a new set of working papers. These working papers, which had been dated as of the audit date, had been signed off by Greg and substantiated the book amount. Bill’s subsequent questioning of the partner revealed that Greg had personally performed additional work on the grain inventory after the client’s year end. Based on his own evidence gathering, the partner had substituted his own working papers for the documentation that Bill had prepared. No evidence remained of Bill’s proposed adjustments. An unqualified opinion was subsequently issued.