Marcus Yamabuto graduated from Washington State University in June 2013. He began his career working for Dunco Industries, a public company that manufactures full HD plasma televisions. Frank Johnson is the CEO of Dunco, and Karen Gross is the CFO. Dunco has a three-person audit committee whose chair is Ken Holden. Dunco is the original equipment manufacturer (OEM) of 42- through 64-inch plasma screens. The company sells its monitors to major manufacturers in the United States and overseas. Marcus was hired directly by the internal audit department and reports to Francey Gordon, the director of internal auditing. Both Marcus and Gordon are CPAs.
Marcus was assigned to review sale documents and freight bills to determine the amount of freight, the terms of the sale, and the proper cutoff treatment. During the course of his examination, Marcus discovered $2.4 million that was prematurely recognized as revenue by the accountants for the year ended December 31, 2013. He identified the problem by matching the invoices with corresponding freight bills and found that the shipping date of the transaction was January 2, 2014.
However, there was a note signed by the freight forwarder: "Picked up for shipment at Dunco warehouse on December 31, 2013." Marcus went to see Gordon to discuss the matter. They determined that the $2.4 million was material and should have been recorded in 2014. They were concerned about the premature revenue recognition given the impending external audit that will begin next week.
Questions
1. What is the role of an external auditor? Is it to simply examine the client's financial statements, or does it involve more-to be an investigator in conducting and completing the audit?
2. Evaluate the actions taken by Sandy Cole and Joan Franks in this case. Were their actions in accordance with ethical and professional standards? Why or why not?