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The New Staff Member
Pavzi Razzouk is working on his first audit after graduation. He came across an
unusual transaction. The client had recorded $1million in operating revenue that
represented a payment from a customer who had backed out of a contract to buy product
from the client. Pavzi discovered that the customer had decided to buy a different
information systems network from a competitor. The contract with the client stated that
customers could be released from purchase contracts by paying $1 million. That
represented 5 percent of the overall contract price.
Pavzi had tried to question the senior on the job but every time he approached
her, she was too busy with other things. She told him after several attempts that she
trusted his judgment and the $1 million probably was recorded in the proper account.
The audit was completed on February 15. The staff members on the audit were to
report to the office the next day for their new assignments. Pavzi just didn’t feel right
about the fact that he couldn’t fully discuss the disclosure of the $1 million with the
senior on the job and it seemed to be a material amount. He also knows that the client’s
income from operations for the twelve months ended December 31, 2010, is only
$895,000.
This case looks at the need for assertiveness in a new staff member to get answers to
questions on how to treat a $1 million fee.
Ethical Issues
The case looks at classification of revenue which could affect operating, but not total net,
income. It addresses the need for self-confidence or assertiveness in a new staff member.
There is room to discuss cultural and gender differences in the workplaces. The ethical
issues are due care, application of GAAP, fairness and diligence in supervision of new
staff.
Questions
1. What are the professional responsibilities of a new staff member when faced
with an accounting issue that appears to have been improperly recorded or
reported?
A new staff member must get a satisfactory explanation to questions from client. If the
staff is not satisfied or comfortable with response from the client, he should take the issue
2. Assume the senior on the audit is a CPA. Do you believe she has violated any
ethical standards of the accounting profession based on the limited
information in the case? If so, explain which rules may have been violated.
If not, explain why you feel that way.
Based upon facts presented it would hard to prove any violations; some areas that could
be improved upon are supervising, training and answering questions from inexperienced
3. Given the facts of the case, where do you think the $1 million should be
recorded? Why? What difference does it make whether the item is recorded
in one category in the income statement versus another? Consider the
possible implications of the disclosure for future operating results.
The $1 million should be recorded as a sales return or other income. If the amount is
