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Case Five: Due Diligence

Facts of the case are as follows
• Gloria Scheps works for Broderick, Samuels, And Underhill as the senior auditor
• Mr. Tom McCarr is Ms. Scheps’ auditing manager
• Sheri Landon is Sito’s accounting manager and Mr. Kilpatrick is Sito’s external CPA
• Sam Proctor is the owner of Sito and had formed the business after securing the rights for the Sito product line from Tsingto Enterprises
• American Artifacts is negotiating the purchase of Sito, a 50 million dollar importer and distributor of cutlery
• Sito is based in Toronto, Canada where the tax at margin is over 50%
• Ms. Scheps was assigned to perform a due diligence on the behalf of American Artifacts on Sito
• Ms. Scheps was told to complete the due diligence report on Sito in 18 days
• Ms. Scheps was given a team of one staff auditor, Jim Harris
• Ms. Scheps due diligence plan is for Mr. Harris to gather the detailed financial reports and reconcile them to the financial statements while she would speak to the owners and key managers
• Mr. Harris discovered that Sito had two same date inventory reports that were materially different from each other and that one inventory listing (the higher one) was used by Mr. Kilpatrick, Sito’s external CPA for an review report
• Mr. Harris reported the discrepancy in the inventory listings to Mr. Scheps and later Ms. Landon. Ms. Landon response to Mr. Harris was, "I think you should discuss this with our accountant, Mr. Kirkpatrick”.
• When Ms. Scheps conducted the follow-up questioning of Ms. Landon on the inventory listing discrepancy, Ms. Landon gave Ms. Scheps a statement for a Sito owned Swiss Bank account. This account was not on any reports as an Sito asset and that Tsingto Enterprises was depositing funds into this account
• Ms. Scheps informed Mr. McCarr of all her findings. Mr. McCarr told her to speak to Mr. Kilpatrick directly and that he would contact Mr. Proctor directly
• Upon being questioned about Mr. Schep’s findings, Mr. Kilpatrick...