PURE GRAIN MEALS: AUDIT Harvard Case Solution & Analysis


  • The independence of the board members cannot be said to be true as the board members have personal dealings with the company. The board member such as the Banker,Mr Mooney is giving loans to the CFO and CEO. The amount of loan is $10 million and this is said to be a huge amount of loan but the key ethical issue here is that this impairs the independence of the board members and hence the board will not work independently if the directors are not independent. The board committee cannot make the top management accountable for its actions if the board is closely working with the top management of the company.The audit firm cannot rely on the audit committee as the independence of the audit committee is impaired and the personnel cannot be trusted as they would try to save the management and conceal its frauds in the company.

The audit committee lacks the individual with a financial background as the audit committee according to corporate governance requires one audit member to have a financial background so that he can consider several financial issues. This will lead to some of the errors or judgements used in the financial statements not being reviewed by the internal auditors and hence the internal audit will not be as effective as it should be. The audit firm cannot rely much on the work of the internal auditors due to lack of competence.

The audit committee members lack the Sec-compliant audits knowledge and this might lead to compliance risk for the company.And as the internal auditor might not conduct the internal audit with the relevant rules and regulations of the country so, the audit firm cannot rely on the work of the internal auditors as their report might not have complied with the relevant laws and regulations of the country regarding the audit.

  • The conflicts in the 401 k forms is that the company is not following the rules for the reporting of retirement plan benefits for the employees.

Further, the law might be different in the country in which the audit firm is and this leads to a conflict in the work of the auditor and the laws of the country.

On the other hand, the audit firm might have different plans for the employees which it considers more appropriate and the company might have a different plan.This can lead to a potential conflict between the auditor and the company.

  • The three ethical issues which might be between the audit team and the client are that there might be a familiarity between the client and the auditor.

Further, the other ethical issue might be that the auditor might get the self-review threat as he might review the work he has done as a non-audit assignment.

The other ethical threat is that the auditor might have the intimidation threat as one of the managers of the firm might intimidate the audit team to issue a clean report. The country laws can prevent this by not allowing the same team for both the audits and the non-audit assignments.

  • The ethical issue in the 401 k forms is that the employees do not want to invest in the contribution fund and the employees might use other person’s name for the contribution plan funds.This will lead to the ethical issue for the audit firm as another employee would be investing in the contribution plan for an employee.

The other ethical issue would be the record keeping required for the contribution plan and the records might be approached by someone who can use the records for their own benefit and this might impair the confidentiality of the client.

The employees might not understand the tax implications and might end up in paying excessive or no tax at all which might be both unethical and illegal in the eye of the law and the auditor.

  • The potential fraud risks for the accounts can be the cash which has inherent risk and has the potential for fraud and can be stolen. The other fraud risk is payroll account which can be manipulated easily if the company has less strict controls.
  • The riskier areas in the financial statements seem to be the sales of the company and in the balance sheet, it is the long-term The sales of any company are always risky as they have high potential to hide money by illegal means such as money laundering. Whereas the long-term debt has the risk of being default or there is always a risk that the covenants of the long-term debt might be breached................

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