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Filmore and Gus, Chartered Accountants, are the auditors of Campbell's Toy Store (CTS),a local retail operation, and you, CA, are in charge of the audit
Filmore and Gus, Chartered Accountants, are the auditors of Campbell's Toy Store (CTS),a local retail operation, and you, CA, are in charge of the audit. In January 2005, you completed the inventory count and internal control testing. All procedures ran smoothly and no discrepancies were found. It is now March 22, 2005, and you are at the CTS offices to start the February 28 year-end audit. The controller, Gina Cooper, is explaining an incident that occurred before year end.
"We lost control of our microcomputer system temporarily. At noon on February 14,2005, our computer system shut down. A red heart appeared on all the computer screens, with "Happy Valentine's Day" written under it. This went on for an hour, after which the computer system started working again.
"It appears that someone introduced a computer virus into our system that affected every program in the network. The virus program was activated by a time and date. Once the program had run its course, our system returned to normal.
"We have no way of knowing just what else this program did. We still don't know how this virus got into the system. It could have been entered by one of our employees playing a joke or by someone breaking into our computer through our modem access, or the program could have come through one of the purchased programs we use. We have spent a lot of time and money trying to remove this program and appear to have succeeded."
After you explained the virus incident to the audit partner, he asked you to provide him with a memo discussing the auditing implications of this event.
Required: Prepare the memo to the partner
Expert Solution
MEMO
To: Audit Partner
Re: Campbell's Toy Store - audit implications of computer virus
March 22, 2005
Date of virus infection: February 14, 2005
Audit Year end: February 28, 2005
Testing prior to year end: Both inventory and internal control testing was completed in January 2005, prior to the virus infection. As a result, the validity of that testing is possibly compromised. We can retest the controls, but even so, we may have to conclude that the system of internal control is inadequate.
If internal controls are deemed unreliable, we have several choices with regard to the completion of the audit.
1. Expand the amount of testing to satisfy ourselves about the competency of the records. This might be a separate engagement with a separate report. A fee adjustment would be needed.
2. Recommend a full security audit by an outside specialist and delay the audit until its completion.
3. Discuss the possibility of a qualified opinion with the client.
4. Year end field work may require additional procedures for more outside confirmation of transactions and balances.
5. Consider discussing possible fraud issues with the client, and whether we should have an engagement which more specifically addresses fraud.
6. Rewrite the engagement letter for the client to include possible effects of the computer virus, and our responsibility in regard to them.
7. Consider an inventory observation immediately.
8. Schedule all the costs associated with this unusual event in order to classify the amount as an extraordinary item, assuming it would meet the definition.
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