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Smith, a young CPA and one of the audit team members for Darwin Electrical Appliances Ltd (Darwin), has developed very good insights into the companys systems in the last 12 months and was asked by his partner, Chris, to draft a report on the reliability of the internal control at Darwin for review. The report is to be used as a part of a due diligence assurance engagement for Darwins prospectus. Darwin wants to be listed on the Australian Securities Exchange by next June.

In carrying out the review, Smith finds a number of matters that concern him. He notices that the controls over inventory requisitions are very poor, leading to numerous complaints from customers about delays and wrong deliveries, and cancellations. Moreover, the inventory records do not show the history or the values of the inventory, so that estimates were used to arrive at the year-end inventory. He also noticed the poor standard of the appliances, with manufacturers warranties long expired.

Smith completes his report, with details of the poor internal controls for his partners review. However, his partner replaces his report with a very brief summary, and a conclusion that the internal control systems are sound and reliable.

Smith makes an appointment to see Chris but is worried as to how he should approach him about Darwin Electrical Appliances issues.

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Discuss the professional and ethical issues faced by Smith and provide an analysis, which can help him deal with the matter with Chris.

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