Premium Essay

Case Study on Professional Skepticism and Auditor Independence

In: Business and Management

Submitted By xutong0368
Words 2311
Pages 10
IN ACCOUNTING EDUCATION Vol. 24, No.2 May 2009 pp.237-252
IS^SUES

A

Case Study on Professional Skepticism and Auditor Independence
Robert L. Braun and H. Lynn Stallworth
ABSTRACT The purpose of this ieaching case is to expand students' understanding of the concepts of professional skepticism and independence. The case is based on an actual incident and illustrates the exercise of professional skepticism by a staff auditor who finds himself in the uncomfortable situation of accusing a friend of fraud. The case demonstrates the difficult personal and professional choices that auditors must sometimes make. ln analyzing the case, students consider auditor independence rules, as well as the concepts of independence in appearance and independence in mental attitude. Students are asked to identify the types of audit evidence and internal controls needed to detect and prevent the fraud, and to consider the appropriate audit response to an adverse situation.

If You Need Love, Get a Puppy:

Keywords: auditing; professional skepticism; fraud; independence; internal controls; misappropriation of assets.

THE CASE ifu is good, thought Will Stallard as he got into his truck that October morning. He T I could have been thinking of any one of a number of things-his wife of seven years, I-/his beautiful baby girl, or his job as a staff auditor at Dykstra, Banister, and Huston (DB&H), a CPA firm with offices in Montgomery and Mobile, Alabama. Or, maybe it was the slight chill in the air and the opening of bow-hunting season in nine days. Whatever it was, his feeling of satisfaction inspired him to reflect on the path that got him to this point this morning. As a nontraditional student at a local universiry he struggled to balance competing demands on his time. He maintained his business as a plumber while carrying nine hours of classes per semester. He could have made...

Similar Documents

Premium Essay

If You Need Love, Get a Puppy

...ISSUES IN ACCOUNTING EDUCATION Vol. 24, No. 2 May 2009 pp. 237–252 If You Need Love, Get a Puppy: A Case Study on Professional Skepticism and Auditor Independence Robert L. Braun and H. Lynn Stallworth ABSTRACT: The purpose of this teaching case is to expand students’ understanding of the concepts of professional skepticism and independence. The case is based on an actual incident and illustrates the exercise of professional skepticism by a staff auditor who finds himself in the uncomfortable situation of accusing a friend of fraud. The case demonstrates the difficult personal and professional choices that auditors must sometimes make. In analyzing the case, students consider auditor independence rules, as well as the concepts of independence in appearance and independence in mental attitude. Students are asked to identify the types of audit evidence and internal controls needed to detect and prevent the fraud, and to consider the appropriate audit response to an adverse situation. Keywords: auditing; professional skepticism; fraud; independence; internal controls; misappropriation of assets. L THE CASE ife is good, thought Will Stallard as he got into his truck that October morning. He could have been thinking of any one of a number of things—his wife of seven years, his beautiful baby girl, or his job as a staff auditor at Dykstra, Banister, and Huston (DB&H), a CPA firm with offices in Montgomery and Mobile, Alabama. Or, maybe it was the slight chill in the air and......

Words: 7050 - Pages: 29

Premium Essay

Buy a Puppy

...ISSUES IN ACCOUNTING EDUCATION Vol. 24, No. 2 May 2009 pp. 237–252 If You Need Love, Get a Puppy: A Case Study on Professional Skepticism and Auditor Independence Robert L. Braun and H. Lynn Stallworth ABSTRACT: The purpose of this teaching case is to expand students’ understanding of the concepts of professional skepticism and independence. The case is based on an actual incident and illustrates the exercise of professional skepticism by a staff auditor who finds himself in the uncomfortable situation of accusing a friend of fraud. The case demonstrates the difficult personal and professional choices that auditors must sometimes make. In analyzing the case, students consider auditor independence rules, as well as the concepts of independence in appearance and independence in mental attitude. Students are asked to identify the types of audit evidence and internal controls needed to detect and prevent the fraud, and to consider the appropriate audit response to an adverse situation. Keywords: auditing; professional skepticism; fraud; independence; internal controls; misappropriation of assets. THE CASE ife is good, thought Will Stallard as he got into his truck that October morning. He could have been thinking of any one of a number of things—his wife of seven years, his beautiful baby girl, or his job as a staff auditor at Dykstra, Banister, and Huston (DB&H), a CPA firm with offices in Montgomery and Mobile, Alabama. Or, maybe it was the slight chill...

Words: 7070 - Pages: 29

Premium Essay

Acis

...RELEASE ON AUDITOR ) INDEPENDENCE AND AUDIT FIRM ) ROTATION; ) ) NOTICE OF ROUNDTABLE ) ) PCAOB Release No. 2011-006 August 16, 2011 PCAOB Rulemaking Docket Matter No. 37 Summary: The Public Company Accounting Oversight Board ("PCAOB" or "Board") is issuing a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced. One possible approach on which the Board is seeking comment is mandatory audit firm rotation, which is explored in detail in this release. However, the Board seeks advice and comment on other approaches as well. The Board will also convene a public roundtable meeting in March 2012, at which interested persons will present their views. Additional details about the roundtable will be announced at a later date. Public Comment: Interested persons may submit written comments to the Board. Such comments should be sent to the Office of the Secretary, PCAOB, 1666 K Street, N.W., Washington, D.C. 20006-2803. Comments also may be submitted by e-mail to comments@pcaobus.org or through the Board's Web site at www.pcaobus.org. All comments should refer to PCAOB Rulemaking Docket Matter No. 37 in the subject or reference line. Comments should be received by the Board no later than 5:00 PM EST on December 14, 2011. Board Contacts: Martin F. Baumann, Chief Auditor and Director of Professional Standards (202/207-9192, baumannm@pcaobus.org), Michael Gurbutt, Associate Chief Auditor......

Words: 15947 - Pages: 64

Premium Essay

Mandatory Firm Rotation

...that has been a hot topic of recent debates is the concept of Mandatory Audit Firm Rotation that was released by the PCAOB (TYSIAC, 2012). The Issue The conception of mandatory firm rotation is not fresh and was even considered by the U.S. Congress in the Sarbanes-Oxley Act. The Congress however dismissed the concept in favor of the mandatory engagement partner rotation (Point of View, 2012). However, years after the conception of mandatory firm rotation was revived. Last August 16, a concept release was issued by the PCAOB to express ideas and the PCAOB began a discussion in order to enhance auditors’ principles, recommending Mandatory Audit Rotation as the means to attain such goals (PCAOB, 2011). While the PCAOB agreed to issue the release of the concept to the public, some members were not convinced that mandatory rotation was the best way to improve audit quality (The Auditors'...

Words: 1246 - Pages: 5

Premium Essay

Professional Skepticism

...The Role of Experience in Professional Skepticism, Knowledge Acquisition, and Fraud Detection Recent notable instances of accounting fraud have led to regulator and public concern over the failure of experienced auditors to detect frauds prior to the issuance of a company’s financial statements. In response, the AIPCA has issued a new auditing standard, SAS 99, Consideration of Fraud in a Financial Statement Audit, in an effort to help auditors better assess fraud risk, detect fraud symptoms, and sharpen professional judgment as to whether a fraud has actually been committed in a firm. The purpose of this term paper is to examine the role of experience in increasing professional skepticism, knowledge acquisition, and ability to detect fraud. We suggest that the typical audit environment does not provide auditors with the type of experience, i.e., practice and feedback with fraud, which is necessary for successful fraud detection. Results of an experiment indicate that audit novices who have received practice and feedback with fraud detection exhibit a higher level of skepticism and knowledge about fraud and are better able to detect a fraud when it exists than individuals with typical audit experience. 1 I. INTRODUCTION The apparent inability of auditors to detect financial statement fraud has prompted regulators, practitioners, and academics to examine the question, “Why do experienced auditors often fail to detect fraud?” There are several factors......

Words: 22501 - Pages: 91

Premium Essay

Audit Responsibilities

...Ryan Mullin Auditing- ACC 304 Assignment 2.63 Auditors are expected to adhere by certain responsibilities, performance and reporting standards. In the case study 2.63 the evidence provided shows that these principles were violated when conducting the audit. Auditors are responsible to be competent and capable in order to perform the audit. It was unsuitable for Holmes to hire two accounting students to perform the audit since they lacked the proper experience in the accounting field needed to be competent and capable. In this case, the two students must have been supervised in order for the audit to be considered an unqualified opinion. “Professional skepticism and professional judgment are necessary responsibilities of an auditor through out the entire course of the audit.” Pg 45 Auditing and Assurance Services 5th Edition. Since Holmes just accepted financial statements without questioning any of the evidence, he did not provide professional skepticism and professional judgment. They simply just checked the numbers to see if the entire math was correct. They did not ask the question: Where are these numbers coming from? Auditors must also adhere to specific ethical requirements. Since the two accounting students were offered a bonus if the bank were to approve the loan, both students did not satisfy the independence requirement. Thus their opinion was not without bias and therefore was not unqualified. Furthermore, since the students were not experienced Holmes......

Words: 313 - Pages: 2

Premium Essay

Accounting

...academicjournals.org/JAT Journal of Accounting and Taxation    Full Length Research Paper Auditors’ perceptions on impact of mandatory audit firm rotation on auditor independence –Evidence from Bahrain Kousay Said* and Hussein Khasharmeh Department of Accounting, College of Business Administration, University of Bahrain, P.O. Box: 32038, Kingdom of Bahrain. st th Received 21 November 2013; Accepted 13 February 2014; Published April 2014 The current study examined several issues regarding auditor independence from the perspective of an emerging market such as Bahrain. Factors affecting the ability of auditors to remain independent include long audit tenure, financial dependence on a single audit client, non-audit services provided to audit clients, ex-auditor employment with an audit client and the existence of audit committees. It is therefore timely to examine the importance of auditor independence in the provision of reliable and credible financial information. The current study uses a questionnaire survey to examine auditors’ perceptions of the impact of mandatory audit firm rotation on auditor independence. The results of the study revealed that the majority of auditors agreed that MAR could safeguard auditor independence. The results also reveal that there is a significant relationship between mandatory audit firm rotation and auditor independence. Analyses of variance (ANOVA) were also conducted to test for the possibility......

Words: 7873 - Pages: 32

Premium Essay

Auditor Rotation

...quality. Definition The PCAOB defines audit quality as providing “independent and reliable audits” regarding management’s financial statements, internal controls and potential threat for going concerns (PCAOB, 2013). Four key aspects of audit quality include independence, objectivity, skepticism, and competence. Maintaining and improving the four elements is critical to increasing audit quality and the usefulness of the information provided. Independence According to the PCAOB Auditing Standards, auditors should maintain independent mental attitudes. Independence is defined by the AICPA Code of Professional Conduct as independence of both, mind and appearance. Independence of mind requires the auditor to act with integrity, free of outside influence whereas independence of appearance requires the avoidance of situations leading to potential conflict of interests. Unless, the auditor is truly independent, the credibility and the reliability of the financial statements are compromised, violating the key objective of accounting: providing investors with relevant and reliable information (Whittington, Rany, 2014). Objectivity The AICPA Code of Professional Conduct requires auditors to be objective meaning that auditors should maintain a position that is free of conflict of interests and potential...

Words: 5991 - Pages: 24

Premium Essay

Management

...Questions   1. Each of the following characteristics describes the importance of integrity in decision making except for:  A. Acting out of moral principle B. Being loyal to one's superior C. Having the courage to do the right thing D. Not subordinating professional judgment to others  2. The ancient Greeks thought of the virtues as characteristics of behavior that:  A. Could lead to a good life B. Make up the "six pillars of character" C. Support the rights theory D. All of the above   3. Ethical relativism can best be described as a:  A. Point of view that morality is relative to the norms of one's culture. B. Concept that holds that integrity should be maintained in the face of pressure by others. C. An ethical reasoning method that holds one should always act out of self-interest. D. An ethical reasoning method that holds one should always consider the effect of one's actions on others. 4. When is it appropriate to contact the audit committee about a difference of opinion with the CFO over an accounting or financial reporting manner?  A. If the CFO does not agree to correct the financial statements B. The CEO supports the CFO and does not agree to correct the financial statements C. The external auditors support the CEO and do not agree to correct the financial statements D. The audit committee should always be the first to be informed about such a difference of opinion   5. An internal accountant should always take the following step after......

Words: 4663 - Pages: 19

Free Essay

Ethics

... Having the courage to do the right thing D. Not subordinating professional judgment to others  2. Ethical relativism can best be described as a:  A. Point of view that morality is relative to the norms of one's culture. B. Concept that holds that integrity should be maintained in the face of pressure by others. C. An ethical reasoning method that holds one should always act out of self-interest. D. An ethical reasoning method that holds one should always consider the effect of one's actions on others. 3. When is it appropriate to contact the audit committee about a difference of opinion with the CFO over an accounting or financial reporting manner?  A. If the CFO does not agree to correct the financial statements B. The CEO supports the CFO and does not agree to correct the financial statements C. The external auditors support the CEO and do not agree to correct the financial statements D. The audit committee should always be the first to be informed about such a difference of opinion   4. An internal accountant should always take the following step after exhausting all avenues of appeal within the organization when there is a difference of opinion with top management on an accounting or financial reporting matter:  A. Inform the SEC B. Terminate employment with the entity C. Seek legal advice before taking any action D. All of the above 5. The Public Interest Principle in the AICPA Code of Professional Conduct recognizes:  A. The importance of integrity......

Words: 2936 - Pages: 12

Premium Essay

Audit

...Section A: Audit Practice Part b (i): Why is the audit of cash important part of the audit? From an auditing standpoint, cash is an important account because cash transactions affect all other business and financial processes. Businesses acquire cash by selling goods or services, disposing of fixed assets, or acquiring debt or equity. The same businesses put their cash to use through purchasing, paying employees, and buying inventory. Audits are an important part of business. Cash audits check that money has been handled properly, and performance audits ascertain whether employees are doing their jobs properly. Corporations are likely to undergo tax audits to ensure proper tax reporting and withholding. Audits may be performed in-house by management or human resources, by a third-party consulting firm hired specifically to perform the audits or by IRS agents who are auditing company tax records. The audit of cash is considered an important part of an audit mainly due to almost all business transactions will be ultimately settled through the cash accounts, the audit of cash accounts also assists in the verification of other asset and liability accounts as well as revenue and expenses. Some of the investor relies on the accuracy of the cash account to evaluate the financial health of the company. They use current asset which include the cash account to compute several financial measures. Other than that, cash is the highly liquid asset in a company and it is an area of high...

Words: 9221 - Pages: 37

Premium Essay

The Language and Culture of the Accountant, Auditor and Forensic Accountant

...The Language and Culture of the Accountant, Auditor and Forensic Accountant Jerry Brockman Davenport University Abstract The overall purpose of this Professional Language and Culture report is to detail the accountant’s communication style and culture, as well as, their specialized language. The report begins with a brief discussion of the origin of accounting, as well as, the distinction between bookkeeping and accounting. Additionally, an examination of the Financial Accounting Standards Board (FASB) provides insight into the culture, ethical values and professional standards of accountants. Other areas of discussion in this report are the voice and tone used in various forms of communication by the accountant. Also, included in this report is an excerpt from an interview of an accounting professional as well as an example from a journal article. These artifacts will provide the reader with examples of the mind-set and communication style of the accountant. Finally, this report concludes with an examination of the auditor’s as well as the forensic accountant’s culture and communication style. Table of Contents Contents Abstract 2 Table of Contents 3 Accounting has been around for centuries.. 4 Professional Standards and Ethics 4 Culture of Professional Standards 5 Language of Business 6 Voice and Tone 6 Specialized Areas of Accounting 7 Communication 8 Forensic Accounting 8 Communication 9 Conclusion 9 References 11 Appendix......

Words: 3164 - Pages: 13

Premium Essay

Auditing

...Regulation, Corporate Governance, and Audit Quality 1. The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements. FALSE 2. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits. TRUE 3. The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the financial statements are free of material fraud. TRUE 4. Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting. TRUE 5. Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements. TRUE 6. An example of fraudulent financial reporting is the treasurer's diversion of hundreds of thousands of dollars into a personal money market account. FALSE 7. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it were its subsidiary. BruceCo. has probably committed fraud because of its misapplication of consolidation principles. TRUE 8. Consideration of fraud in financial statement audits is a relatively new concept derived originally from the Sarbanes-Oxley Act. FALSE 9. The most important lesson to be learned from The Great Salad Oil Swindle is that auditors can commit fraud by falsely including inventory that does not......

Words: 6460 - Pages: 26

Premium Essay

The Factors Which Changed Auditing

...transactions or accounts and detect fraud has been present since the advent of trade and accounting. Thus the goal of auditing, in this sense, has not changed since. Teck-Heang Lee observed that “auditing serves as a mechanism to monitor conduct and performance, and to secure and enforce accountability (Lee 2008). All in all, an audit function plays a crucial role in maintain welfare and stability in society.” However, what has changed is how the roles and responsibilities of auditors have changed to reflect the needs of the business environment of the time. As such, auditors and the auditing profession have always played a very important role in business and, more recently, in society in general. As business in today’s world becomes more dynamic, accounting (and therefore by extension auditing) must also evolve to become more dynamic. The evolution of auditing is a complicated history that has always been changing through historical events. This can be seen in the shift in the role of external auditors from a cyclical audit approach to now more of a top-down risk-based continuous audit. The factors that have played a major role in this shift of role and responsibilities are the cycle of fraud, regulation, and compliance; and also the rise and importance of technology in the Information Age we currently live in. The combination of these two factors has had a profound impact on the auditing profession and has helped solidify its place in society as serving the public......

Words: 5760 - Pages: 24

Premium Essay

Auditing Assignemnt

...Fordham University Graduate School of Business ACGB 7171 Auditing of Accounting Systems I—Fall 2013 Course Objectives: The objective of this course is to introduce students to the auditor’s decision-making process in both an audit of financial statements and an audit of internal controls over financial reporting. The class consists of lecture, individual case studies and in class exercises. Students are given an introduction to the following topics: • Generally Accepted Auditing Standards (GAAS) • The AICPA Code of Professional Conduct and its related rules and interpretations • An auditors’ legal responsibilities • Auditors professional judgment • The evaluation and testing of internal controls • The effect of IT on the audit process • The development of an audit program • PCAOB standards • The auditor's reports Book: Auditing and Assurance Services by Arens, Elder and Beasley 14ed Publisher Pearson/PrenHall ISBN 978013257595 |2013 |Topic |Assignment/Chapter to read | |Thursday September 5th |Introduction to the CPA Profession and the Auditing |Chapters 1 and 2 | | |Environment | | | | ...

Words: 473 - Pages: 2