In a letter to the audit committee of the Cline Wholesale Company, Jerry Schwartz, CPA, informed them of material weaknesses in the controls over inven-
tory. In a separate letter to senior management, he elaborated on how the material weaknesses could result in a significant misstatement of inventory by the failure to recognize the existence of obsolete items. In addition, Schwartz made specific recommendations
Research
Required
Required
In-class
Discussion
Chapter 24 / COMPLETING THE AUDIT 813
in the management letter on how to improve internal control and save clerical time by
installing a new computer system for the company’s perpetual records. Management accepted the recommendations and installed the system under Schwartz’s direction. For several months, the system worked beautifully, but unforeseen problems developed when a master file was erased. The cost of reproducing and processing the inventory records to correct the error was significant, and management decided to scrap the entire project. The company sued Schwartz for failure to use adequate professional judgment in making the recommendations.
a. What is Schwartz’s legal and professional responsibility in the issuance of manage-
ment letters?
b. Discuss the major considerations that will determine whether he is liable in this
situation.
