[SOLVED] Jane1 Ashley was a staff accountant at

Jane1 Ashley was a staff accountant at Viccio & Martin, an accounting firm located in Windsor, Ontario. Jane had been a co-op student while in college, and during her first work term with the firm, she had the privilege of being on several audits of various medium-sized companies in the Windsor area, where she picked up some valuable audit experience. Fresh out of her final academic term, she felt ready to put her scholastic knowledge to work and show the seniors and partners of Viccio & Martin her stuff.
In her first assignment, Jane was placed on an audit team consisting of herself and a senior. This senior, Frankie Small, had been a qualified accountant for five years and had been on staff for over ten. He was well respected within the company and was known for his ability to continually bring engagements in under budget.
The client, Models Inc., which was Viccio & Martin’s largest, was a private corporation which made its business in the distribution of self-assembly, replica models, toys, and other gaming products. It operated from a central warehouse in Windsor but also distributed from a small warehouse in Toronto and had a drop-off point in Michigan as it purchased merchandise from companies in the United States. Its year end was April 30. Since Jane had joined the firm on May 15, she had not been present for the year-end inventory count, which was taken on the year-end date. Frankie S. was present, along with another co-op student, who, incidentally, had returned for her final academic term on May 11. Jane asked Frankie how just two people could simultaneously be present for an inventory count at three locations. Frankie responded by telling her that since the inventory balances at the Toronto warehouse and Michigan drop-off sites were of immaterial amounts (based on representations by management, company records, and audits in prior years), audit staff had only been present at the Windsor warehouse count. Models Inc. was on a periodic inventory system.
Since she had not been on this engagement before, the evening before her first day of fieldwork, Jane stayed at work late to review the previous year’s audit files, this year’s audit programs, and the notes on this year’s inventory count so she could gain a knowledge of the client’s business. After an hour or so of reviewing the information, Jane gained a knowledge of the client, but she could not quite understand what was happening with the inventory section because the working papers were messy and disorganized. On reviewing the inventory sheets from this year’s count, she found that many of the items were unfamiliar and were referenced only by general product names; there were no serial numbers, no order numbers.
The first day of fieldwork arrived, and Jane was given the responsibility of accounts- payable cutoff. On tracing invoices to the master accounts-payable ledger, Jane found that she was having a hard time locating many of them. She brought this matter to the attention of the accounts-payable clerk, who provided the explanation that invoices received after the year-end date were not yet entered in the current year but should have been. Jane was provided with this list and traced it to the journal entry made to pick up the extra payables. Jane then performed audit procedures on this extra list. She again found that it was incomplete. The total cutoff problem was, in her estimation (of sample to population figures), in excess of $400,000. She also noted that many of the invoices received had invoice dates after April 30, but title to these goods had changed hands (F.O.B. shipping point) prior to April 30.
The financial statements originally provided by management showed healthy profits of $150,000. The current accounts- payable (trade) balance was $1.4 million, which was up over a half a million from last year. The current receivables balance was $800,000, which was up about $100,000 from the previous year. Sales had jumped from $8 million in 1988 to $10 million this year. The company had an operating (demand) line of credit with a lending institution of $1 million. The company owned its two warehouses, which had a net equity of approximately $1,600,000 at fair market.
Jane brought the cutoff problem to the attention of Frankie, who was perplexed and surprised by the whole issue. The two returned to the office that evening, and Jane was asked to prepare a memorandum explaining her findings. It was reviewed by the partner in charge, Mr. Viccio, who contacted the appropriate level of management of Models Inc. to explain the discrepancy.
The accounts-payable clerk recorded the transactions Jane had found left out, and the audit testing was again performed on the accounts-payable cutoff and the rest of the accounts-payable section to the satisfaction of the auditors with respect to all financial statement assertions. The total corrections made to accounts payable were in the order of $350,000. The impact of the adjustments was partially to inventory, where traceable, and partly to cost of goods sold. The total effect on the profit figure was $300,000. The financial statements showed a loss of $150,000.
The head manager and 50% shareholder of the corporation, Mrs. Hyst, was astonished and panic stricken by the entire situation. She was sure something was wrong and that this problem would be rectified at some point throughout the remainder of the audit.
No problems were encountered throughout the remainder of the audit fieldwork; however, Jane did notice, when she was in the accounts-payable clerk’s office, that the clerk spent a great deal of time on the phone with suppliers, discussing how Models Inc. could pay down its over-ninety-day payables such that the company would not be cut off from purchasing further goods.
Toward the finalization of the audit, Mrs. Hyst came to the auditors and told them that there was most likely inventory that had been left out of the count. She provided a listing that amounted to approximately $200,000. In this listing were material amounts of inventory in the Toronto warehouse, the Michigan drop-off point, goods in transit, and goods stored at other locations.
The auditors, who were surprised by the list, decided to perform tests on it and found that it was very difficult and often impossible to track the inventory, given the poor system used by the company. Jane telephoned all of the companies that appeared on the list under “goods stored at other locations” and, in all cases, found that no inventory was being kept on behalf of Models Inc. Suppliers in the United States were telephoned for exact shipment dates, and based on the evidence of how long it usually takes to bring goods across the border, it was determined that those goods were included in the year-end inventory count. As for the “extra” inventory stored in the Toronto and Michigan sites, there was no reliable evidence that anything not already accounted for was there. However, there was no way to tell for sure. From the items on this extra list, $50,000 was accounted for as either already counted in inventory as of the year-end date or included in cost of goods sold. The whereabouts of the other $150,000 was not determinable.
Mrs. Hyst was asked to discuss this listing. At the meeting, Mr. Viccio, Frankie, and Jane were all present. Mrs. Hyst stated that if she showed these sorts of losses, the bank would surely call the company’s operating loan of $1 million, and it would “go under.” Mr. Viccio asked the client whether there was any way of determining where the other $150,000 was. She explained that it was hard, given their inadequate inventory system, but she was pretty sure that it was not counted in the year-end inventory count.
After the meeting, Mr. Viccio explained that there was no reason to doubt management’s good faith and that the $150,000 most likely should be added to inventory and taken out of cost of goods sold. Frankie went along with this. Jane, however, was astonished. She felt that since there was no evidence backing up the claims made by the client, the firm should be conservative. She also related her experience to the other two concerning the problems the company was having with keeping up with its trade payables.
Mr. Viccio explained to her that the $150,000 should be added back to inventory and that, even if it was the cost of goods sold, the client will most likely recover in the near future anyway. “In these situations, we must help the client; we can- not be responsible for its downfall. Who are we to say that there isn’t an extra $150,000 in inventory—we’re just guessing.” Frankie added to this by saying that if the loan were called, there would be plenty of equity in the buildings of the company to pay it off.
Jane went home that day very distraught. She felt that Mr. Viccio’s decision was based on audit fees and that a poor picture on the financial statements would result in the loan being called and Mr. Viccio would not get his fees. Jane was also disappointed with the level of responsibility shown by Frankie, the senior. Jane could not believe what was happening given the fact that the original reason for the audit was because the bank had requested it several years ago as the operating loan was increasing. Jane was also aware that Model Inc.’s major suppliers were requesting the year-end statements as well and, based on them, would make a decision whether to extend the company any more credit.
The next day, Jane expressed her opinion in a morning meeting held in Mr. Viccio’s office. Frankie was also present. She was told that the $150,000 would be added back to inventory.
Question
1. What should Jane do? Why?

Question: Jane1 Ashley was a staff accountant at