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The Dec 2011 P7 question four, Cedar Co, had the following paragraph in it (extract)
You are an audit manager in Cedar & Co, responsible for the audit of Chestnut Co, a large company which provides information technology services to business customers. The finance director of Chestnut Co, Jack Privet, contacted you this morning, saying: ‘I was alerted yesterday to a fraud being conducted by members of our sales team. It appears that several sales representatives have been claiming reimbursement for fictitious travel and client entertaining expenses and inflating actual expenses incurred. Specifically, it has been alleged that the sales representatives have claimed on expenses for items such as gifts for clients and office supplies which were never actually purchased, claimed for business-class airline tickets but in reality had purchased economy tickets, claimed for non-existent business mileage and used the company credit card to purchase items for personal use. I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses”
In a later statement in the question, she states “The audit opinion on the financial statements for the year ended 31. March. 2011 was unmodified”
Requirement (a) states “Assess the ethical and professional issues raised by the request for your firm to investigate the alleged fraudulent activity” (6 marks)
One of the professional issues I thought was considering quality control (quality control is a professional issue after all and investigating why we missed out on a material misstatement due to fraud and whether we need to improve the way we do our audit and the skills of our audit team, making them more competent)
However, the P7, examiner stated in her Dec 2011 report to this questions the following:
“Some answers also discussed whether the audit firm would have the necessary skills and resources to perform such a specialist piece of work. Some answers however tended to focus on why the audit firm had not discovered the fraud during the previous audit, and the possibility of the audit firm being sued for negligence or the need to “discipline” the
audit manager.”I think the point on suing for negligence is valid as the audit firm have not detected a material misstatement and also we should ask ourselves why the audit firm had not discovered the fraud in the previous audit, after all, in a later statement in the question, she states “The audit opinion on the financial statements for the year ended 31. March. 2011 was unmodified”
So why is the examiner having a problem with these points? I don’t understand. Please explain. They seem valid to me.
Our own quality control issues are only tangentially relevant to this question – the question is asking what are the issues behind the request for us to take n the assignment ie we’re looking forwards to the making of this decision.
I can understand, and probably would myself, why you have included a point about us needing to review our own recruitment and training methods in order that we reduce the chance of us missing material misstatements in the future but that’s really only an aside, an incidental comment ting to squeeze another mark.
It’s not fundamental to the decision as to whether or not we should accept the assignment.
Try this! I’ve invited you to take on a non-audit assignment. Going through your head immediately is the question about quality control in your recruitment and training policies. Errrr, no! Self review, self interest, advocacy, competence, fee levels, objectivity …… yes.
But quality control? Probably not
However, I’ve said higher up that I too would probably have included a sentence in my answer. Something like (at the end of my answer) …….
“Incidentally, Cedar & Co should consider whether their own standards in auditing have been breached allowing a material misstatement to remain undiscovered. This quality control issue could well be internally investigated but will have no affect on the decision as to whether the invitation from Chestnut should be accepted”
Ok?
And why is the possibility of the audit firm being sued for negligence or the need to “discipline” the audit manager.” not a valid point? In real life, it would be very possible is it because the fraud is just alleged and has not yet been proved?
No, it’s because neither of those actions is relevant to the question! What matters would you consider (etical and professional) in making your decision whether to accept Chestnut’s invitation for you to investigate the fraud.
Sure, negligence, admonishment and quality control are all relevant, but not to this question. How does the issue of disciplining the audit manager help us in our decision whether to accept or not?
As I said in my previous post, yes, bring it in to your answer, but only as a one sentence point at the end of your answer – almost as an after-thought, a “by the way” incidental comment
Ok?
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