Audit Independence Rules and Key to the Detection of the Fraud - Assignment Example

A. The key to the detection of the fraud: Will’s professional skepticism Professional Skepticism In the contemporary auditing debate centering on professional skepticism, presumptive doubt, and neutrality have gained prominence. With neutrality, auditors neither trust nor distrust client management, while presumptive doubt relates to auditors assuming some level of dishonesty by management, unless evidence indicates otherwise. Professional skepticism represents a critical assessment of audit evidence/management assertions/supporting evidence through adoption of a questioning approach. This arises out of recognition that circumstances may exist in which the financial statements may manifest, material misstatements. 2) Examples of Will’s Exercise of Professional Skepticism In the case, Will’s exercise of professional skepticism is evident. Will demonstrates a questioning mind/mindset, or being alert to situations that may indicate probable misstatement (fraud/error). First, Will decided to take the receipt to Jess to enquire the disparity in cash payments that failed to manifest in that day’s bank deposit. Professional skepticism played a vital role in aiding the auditor realize that the entry in the receipt book was in black ink while the voucher was in blue ink, a glaring disparity, as they should have been completed in the same ink since they were completed at the same time. Moreover, Will noted that the bills were sticky, which meant that they came straight from bank to pay the ticket; indeed that was the case as the bills were “Series 2006.” 3) Conditions Present in the case that could have limited Will’s skepticism The most prominent threat in Jess’s case entails familiarity threat whereby there is along, and close relationship that create a sympathetic bond between Will and Jess. Jessica Randle was the wife of his best friend Nacho, which presented a potential of conflict of interest, which could compromise Will’s independence. Indeed, at first, Will viewed the explanation given by Jess that bank deposit had fallen in between two cabinets in the vault as a reasonable explanation. Initially, Will thought that it was unnecessary to pay attention to such a “small item” owing to time pressures. Without professional skepticism, the auditor might have elevated his close relationship with Jess over laid professional conduct. B. Audit Independence Rules 1) Generally Accepted Auditing Standards requirement for Independence Generally accepted auditing standards represent those guidelines that auditors must adhere to in the course of conducting an audit. Independence is the most crucial attribute of an auditor and an auditor should remain independent of the client at all times and avert any situations that jeopardize his/her independence (Fearnley, Beattie & Brandt, 2005). Auditor independence infers to the independence of the internal/external auditor from parties that may manifest a financial interest within the entity being audited. The auditor ought to maintain independence (in appearance and in fact) in mental attitude and all aspects relating to the audit. 2) Independence in Appearance and how is it Achieved Real independence infers the actual independence of the auditor and concerns the state of mind of the auditor the manner in which the auditor acts. An auditor who is independent in fact bears the capability to arrive at independent decisions regardless of whether there is a perceived absence of independence. Moreover, an auditor’s objectivity ought to go beyond question, but the main concern lies in guaranteeing and measuring auditor’s objectivity (Rittenberg, Johnstone & Gramling, 2012). This highlights the significance of perceived independence. It is essential that the auditor should not only act independently, but should also appear to be independent too. In the event that an auditor is independent, in fact, but other factors suggest the contrary this could probably lead to the public concluding that that auditor fails to represent a true and fair view. 3) Code of Professional Conduct addressing the issue of personal client relationships A professional code of conduct effectively addresses client relationships as it defines and standardizes expectations for individuals within various occupations. A professional code of conduct outlines a professions (auditing) mission and outlines the core values and ethical standards. The code of professional conduct lays the basis of maintaining independence, both, in fact, and appearance, from clients in exercising appropriate professional responsibilities. 4) Comparison of Independence in Mental Attitude and Independence in Appearance The state of mind that allows the expression of a conclusion devoid of being affected by influences that compromise professional judgment allows an individual to act with integrity, and exercise objectivity and professional skepticism. Independence, in fact, demands that auditors have an objective state of mind. This relates to the forestalling of facts and situations that are so material that a reasonable, and informed third party would probably conclude, based on all the facts and circumstances that an entity’s, or a member of the audit team’s, objectivity, integrity, or professional skepticism has been compromised. Appearance of independence demands that auditors circumvent any conflict of interests with the clients (financial or self interest) that might endanger the public’s confidence in an auditor’s judgment and performance or identified as irreconcilable with the objectivity critical to fulfilling professional responsibilities. Independence in appearance cautions members to avoid situations that would render an informed third party, comprehending all the relevant facts, to exercise skepticism regarding the attest engagement. 5) Will’s Independence To be independent, the auditor ought to be intellectually honest, recognized an independent, and free from any obligation to or interests in the client. Will independence in the case came under threat due to familiarity threat and potential of intimidation threat. Will had a long relationship with Jess that could affect his independence and, ultimately, his capability to exercise appropriate skepticism (Braun & Stallworth, 2009). 6) Factor that plays the Greatest Role in Determining Auditor Independence Financial and employment relationships play the greatest role in influencing and auditor’s independence. Financial and employment relations may generate auditor conflicts of interest that threaten the independence of the auditor. 7) Promote Independence in Auditing To promote independence, changes may be required to address institutional familiarity threats that may distort the independence of the auditor. The benefits of this approach entail safeguarding against the formation of unduly familiar relationships with management of firms being audited, heralding a fresh and objective perspective of a new audit firm, stimulating enhanced audit quality, and minimizing institutional familiarity (Duska, Duska & Ragatz, 2011). C. Examination of Evidence in Support of Jess’s Position Evidence in support of Jess’s position is manifested by the fact that 90% of the documents that Will traced or vouched manifested no problem save for the remaining 10%. Indeed, all of the noncash transactions and of the cash transactions that were accounted as necessary, besides they do not possess many tickets paid in cash. Contradicting evidence to Jess’s position flow the fact that, the receipts were marked as paid in the receipt book, but were not included with the day’s deposit. The receipt book and the daily receipts voucher perfectly agreed, but the entry in the receipt book did not feature in bank deposits. Moreover, the 320$ in crisp new bills money contained in envelop written by Jess were sticky, which means that they came straight from the bank; indeed that was the case as the bills were “Series 2006.” D. Controls that could help Prevent or detect the Theft Preventive controls are structured to discourage errors or irregularities such as employment of computer application that safeguards validity of account numbers. Detective controls are structured to highlight an error or irregularity after manifestation such as a comparison of validated Cash Receipt Vouchers to monthly financial statements to track deposits, and exception report to detect and list incorrect or invalid entries or transactions. Tighter controls with regard to improvement of handling cash receipts and disbursements are necessary to mitigate fraud (Golden, & Golden, 2011). The department in which Jess worked should have had written procedures encouraging compliance. E. Steps to bring the Audit to a Successful Conclusion There are three key steps that auditors should adhere to in delivering their mandate, namely: highlighting threats to the auditor’s independence and analyzing their significance, evaluating the effectiveness of potential safeguards, inclusive of restrictions, and highlighting and acceptable level of independence risk. The undertaking of the audit should be guided by the principles of professional conduct in which member are expected to follow professional and moral judgments in all undertaking; embrace the obligation to act in a manner that serves the public interest/trust and demonstrate commitment to professionalism; and, maintaining objectivity and avoiding conflict of interest in discharging professional mandate. F. Pressure that Auditors Face in Dealing with Misappropriation of assets Overall, auditors face significant pressures with regard to time management and managing objectivity. The threats to an auditor’s independence mirror pressures or other factors that hinders an auditor’s objectivity (Dauber, 2009). Auditors are expected to overcome the threats that compromise objectivity in order to be independent. Identifying sources of threats aids to illuminate their nature and influence the auditors’ independence. The five potential threats to auditor independence include self-interests threats (emotional, financial, or personal); self-review threats; advocacy threats; familiarity/trust threats; and, intimation threats. G. Steps in Resolving Moral Dilemmas In considering the alternatives, one is required to think about the range of positive and negative consequences linked with each of the diverse paths of action. The alternatives in this case can be delineated as doing the right thing (highlighting the misappropriation linked to the ticked) or sweeping the incidence under the carper and disregarding the Professional code of conduct. This entails probing the benefits and harms involved and the relative values derived from a certain form of action. The first option is the right call since despite being toxic to the relationship between him and Jess; the decision aligns with the professional code of conduct. The second option may appear easy, but is harmful in the long-run. References Braun, R. & Stallworth, L. (2009). If you need love, get a puppy: Acase study on professional skepticism and auditor independence. Issues in Accounting Education, 24 (2): 237-252. Dauber, N. A. (2009). The complete guide to auditing standards, and other professional standards for accountants, 2009. Somerset, NJ: Wiley. Duska, R. F., Duska, B. S., & Ragatz, J. A. (2011). Accounting Ethics. Hoboken, NJ: John Wiley & Sons. Fearnley, S. and Beattie, V. and Brandt, R. (2005). Auditor independence and audit risk: a reconceptualisation. Journal of International Accounting Research, 4(1): 39-71. Golden, T. W., & Golden, T. W. (2011). A guide to forensic accounting investigation. Hoboken, NJ: Wiley. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2012). Auditing: A business risk approach. Mason, OH: South-Western Cengage Learning. Read More