Individual Assignment #1 (worth 3%) Fall 2023

POSTED: Monday, September 25 th , 2023 DUE: Monday, October 2 nd @ 7PM through Turnitin (MY E-CLASS) INDIVIDUAL ASSIGNMENT #1 (3%) Bartosz Amerski is an internal auditor employed by WII-FII Industries. He is nearing completion of an audit of one of its manufacturing divisions (TIE-DYE) during the first 6 months of the calendar year. TIE-DYE is one of five (5) manufacturing divisions in WII-FII Industries, and manufactures approximately 40% of WII-FII's sales in the year. WII-FII Industries has two (2) marketing divisions (international and domestic) and a technical service division that offers technical support. Each customer is assigned to the most suitable manufacturing division, which functions as the supplier for that customer. The manufacturing division then approves the customer's credit, ships against orders obtained by the sales representatives and collects the customer receivables when due. This allows order-to-order monitoring of customer credits limits against customer orders received. There are two (2) items that concern Bartosz. Firstly, there was a material dollar amount of inventory of part 'X5' still carried on the TIE-DYE books at year-end, despite the fact that 'Xylo- FI' machining component in which part 'X5' was used is now considered second generation and is no longer manufactured. Company policy requires an immediate write-off of all obsolete inventory items. And secondly, some accounts receivable still carried as collectible at year-end were more than 180 days old. All receivables are due in 30 days, which is standard for the industry. Bartosz believes many of these accounts are uncollectible. The division manager's administrative assistant, Shahir Kazemi, performed the aging of accounts receivable rather than the division accountant, as is standard practice. The division accountant refused to discuss the circumstances of Shahir's actions. Bartosz scheduled a meeting with Shahir to discuss his concerns. "Well, Bartosz," Shahir responded, "I know that policy requires that obsolete inventory be written off, but part of 'X5' is just not being used at present. We might start to make those 'Xylo-FI' components again. Who knows? The 1990s baggy suits are coming back into style again, aren't they?! 'Xylo-Fi' could, too. There are plenty of customers, especially in the third world, that are finding those second and third-generation machines pretty expensive to maintain. I mean, there is a policy that states obsolete inventories should be written off, but there is no policy defining an obsolete part." "And as for those receivables," Shahir continued, "that is certainly a judgment call, too. Who knows if those accounts will be collected? With the pandemic still in play, we're in slight recession now. When things pick up, we'll probably collect a few. There isn't even a policy in this division on writing off receivables. I checked. Nothing says I have to write them who are you to say I have to?"
"Shahir, be straight with me. You know those parts will never be used, and you know those receivables are bad." "Look, Bartosz" Shahir finally bargained, "it's only a few weeks from the close of the year. Let's allow these items ride till after the close so that everyone gets their bonuses. Then, I promise I'll take a fresh look at both inventories and receivables. I'll write down after year-end, after the financial reports are issued. No one will know. And, after all, who's to be hurt? Bartosz continued his audit, drafted his report containing observations related to the inventory and receivables, and reviewed the report with the division manager, Adam Reuben. Adam was visibly disturbed. "Geez, Bartosz, this couldn't have come at a more awkward time. Our figures just passed muster by the independent outside auditors. There was a guy out here for our inventory count in November, and Brenda already sent her spreadsheet on year-end receivables to corporate head-quarters. No one up there, in our group or on the CPA audit team, was the least bit critical. If you go raising a big stink, particularly now, the independent outside auditors will catch us writing off inventory and receivables, they'll adjust profit, and there will be hell to pay for all of us. And, Bartosz, this no clear-cut issue either. I mean, I can see how you can write a report calling for a clearer policy, but not one calling for specific write-downs. That's way out of your jurisdiction. But still, I promise, we'll look at all this after our financial statements go to bed. Right now, I feel the managers of this division have worked their hearts out and I intend to fight to protect what little bonuses they have coming. If we write down as you suggest, those bonuses will go and the stockholders will lose too. Earnings per share (EPS) will drop like a rock. They might even close this division. Now, you don't want that, do you, Bartosz? Well, Adam, I could word my observations as they are in the draft but include your response." Adam was suddenly very angry and annoyed. "What? And let the audit committee decide the issue? They have nothing to do with this. They accepted the CPA's report. If you want to make the audit committee happy, you'll accept it too, and leave this adjustment stuff alone. Concerned, Bartosz delayed finalizing his report and discussed the draft with Joanne Jones, director of internal audit. Joanne is not trained as an auditor and was promoted to director of internal audit from corporate finance so that she might develop a better understanding of operating relationships. Still, Joanne is very smart and Bartosz has always respected her opinion. The discussion was by phone, with Bartosz still at the TIE-DYE division headquarters and Joanne at the corporate office. "Bartosz, Adam is right. If you, in essence, blow the whistle on management bonuses this year, we can kiss goodbye all the goodwill I've been struggling to build for this department. It will all go out the window."
"I know you've been trying to put us on a better footing, Joanne, but Adam is intractable. As far as he is concerned, the only observation he will accept in the report is that of a deficient policy, with nothing mentioned about the inventory or receivables needing adjustment. "Well, do what you have to," Joanne ended the discussion. "But I insist that you submit a report that Adam agrees to and has signed. I don't want to stir up the hornets nest and then have to try to explain my loose canon to the board when everyone is howling about the bonus problem." REQUIRED: 1. Please refer to the IIA's Code of Ethics. Identify three (3) specific Rules of Conduct relevant to this case. Using the Rules of Conduct you identify as the context, discuss the ethical issues raised in the case (6 marks). 2. Please discuss the ethical dilemma Bartosz faces that might have been avoided. In other words, discuss five (5) specific things TIE-DYE's management and/or the internal audit function might have done to reduce the risk of such a situation arising (10 marks). 3. indicate what you would do if you found yourself in Bartosz's position. Relate your response to the IIA standards. (4 marks). Total is 20 marks.
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