Leader:
Members:
Gapuz, Bonjovi C.
Castillo, Ma. Jubelle
Chua, Steward
Guillermo, Lynette
Oamil, Queenie
Ortiz, Arnold A.
Pagdilao, Clarisa S.
Sebastian, Yvie Diane
Yadao, Erin Joyce
Exercise 1
1) The ethical implications may include the small loan company failing. Due to David's lack of
participation in the company, mismanagement of the loan business is highly probable. Thus, it may
end up failing in the long run if David continues to put aside his responsibilities as the owner.
2) The employees may also end up working less efficiently and effectively because of the lack of
supervision.
3) David himself, will also be at a disadvantage because his full commitment to work will be
affected. At the end of the day, he has to face the problems regarding his loan company which may
in turn affect his work as a lawyer and vice versa. One way or another it won't be possible to fully
commit to either of his work.
Exercise 2
1) Frank Doran is the senior audit manager for Cruz and Santos, CPAs. His promotion to partner
is already planned by the firm with the condition that he continues to perform at the same highquality level. Frank has been assigned to audit the Machine International, one of Cruz and Santos’
most prestigious clients. He found out that the company uses a revenue recognition method called
“bill and hold” that has recently been questioned by SEC. This method was used by the company
for 10 years. There is a conflict between his engagement partner and him in this matter. The
engagement partner concludes that the method used is appropriate, especially because the client
does not file with the SEC. Frank on the other hand, argues that the method used is appropriate in
prior years, but the new SEC ruling makes it inappropriate in the current year. The engagement
partner takes full responsibility for making the final decision if a legal dispute ever arises with the
condition that Frank will not include a statement in the working papers that he disagrees with the
partner’s decision.
2) Is it ethical for Frank to not follow the requirements and blindly agree to his partner’s decision
or for him to disclose the violated rulings of the SEC by Machine International?
3) Who is Affected and How is each Affected?
Frank Doran
 He can't state that he disagrees with the decision of the partner.
 They may lose the client if he pushes through with his opinion.
 It may affect his future position in the firm.
 He might end up not getting his promotion
 Attitude about firm may be affected
Cruz and Santos, CPAs
 Engagement partners may create misstatements about the audit report.
 They may lose one of their biggest client
Machine International
 The reputation of the company may be damaged
 They may face legal problems regarding their used of recognition method
Frank’s Partner
 A misstatement may arise because of her opinion
 Her opinion may create audit risk.
 She will suffer and may lose her job in case a legal dispute arise
 May not conclude the right assessment of the client's financial report.
SEC


One of the rulings may be violated
May not check the compliance of the client because they do not file to them
Users of Machine International Financial Statements
 Investors of the company may think that Machine International has always a big amount
of sales not knowing about its revenue recognition, which is the bill and hold.
 The overstatements of the sales may become a major factor in the decision making of the
managers for the company and they may not make an appropriate decision for their future
plans with these unrealistic sales.
4) Frank’s Available Alternatives
 As a senior audit manager, it is his duty to review the reports so he should always make
sure that his opinions were right and base on factual sufficient appropriate evidence before
making a conclusion.





Notify the Machine International that their bill and hold revenue recognition is not
appropriate according to the new ruling of the Security and Exchange Commission.
Advice the Machine International to follow the ruling of SEC, and change its revenue
recognition before it may review by others that their sales are not their official currently
sales as of the moment.
If it is proven, that according to the sufficient appropriate evidence that the revenue
recognition of the Machine International was inappropriate, he should disagree with the
opinion of the engagement partner that the financial statements of the company do not
comply with the framework.
If the engagement partner insists on her opinion and conclusion, given that the Machine
International’s financial statement was inappropriate wrong, he should refuse to continue
with the engagement.
If however, there is not much sufficient appropriate evidence that the financial statements
of the Machine International were inappropriately done, Frank Doran should always look
towards all possibilities and listen to the point of the engagement partner.
 Each of these options includes a potential consequence, the worst likely
losing his promotion.
5) Consequences Of Each Alternative
 If he works according to the code of ethics of an auditor, it is highly likely for him to make
a conclusion that was based on facts and as a result, the audit report that will be attached
to the financial statement will have a high assurance.
 If Machine International will have knowledge that its revenue recognition was made
inappropriately, they may either choose between to right their sales or to continue with
their bill and hold, however, the company’s response to the auditor’s advice is unknown
and as a big client, there will be a big risk that Cruz and Santos, CPAs will lose their big
client if the Machine International doesn’t like the intention of the auditors to correct their
wrongdoings.
 The engagement partner may ask him to just agree that the revenue recognition of the
Machine International as appropriate, however, he may also be responsible when a legal
dispute arises.
 Frank Doran may not be able to perform the audit and he will not be able to correct the
misstatement of the client's financial statement and financial information.
 He may not be able to become a partner in a year or two if he continues to disagree with
the engagement partner.
6) Frank should not blindly accept his partner’s decision. It is only right for Frank to write a report
regarding his findings on the unethical practices of their client. It is not just for his own sake when
there will be a legal dispute that will arise but also for transparency to the shareholders and other
users of the financial statement, as it is important in their decision making.
Furthermore, in making his decision, he should also consider all the factors that may affect their
firm because he carries it with him as a senior audit manager, together with his staffs in the team,
they all should check every little detail to come up with an appropriate conclusion that is rightly
based on sufficient appropriate evidence.