Introduction
Auditing profession requires auditors to maintain professional independence throughout their audit engagement (Feldstein, 2002). Independence of an auditor is threatened by many factors such as financial interest and personal relationships between the auditor and the client’s staff. Professional skepticism is an important ingredient of the audit engagement and enables the auditor to gather sufficient evidence so as to give a reasonable assurance as to whether the audited financial statements are free from misstatements.
- Professional skepticism in auditing profession refers to a situation whereby the auditor fails to accept the audit evidence which he has gathered at face value (Caswell & Allen 2001). This therefore means that the auditor has to exhaust all the sources of evidence on the audit assignment so as to get a reasonable assurance as to whether the financial statements are free from misstatements which may be caused by errors or frauds. The auditor should also critically analyze the evidence which he has gathered but avoid being overly suspicious.
- Some of the specific examples of Will’s exercise of professional skepticism in this case include:
First, this was Will’s first audit assignment on his own at DB&H and this means that his work would be reviewed by other auditors so as to ensure correct reporting of the company’s performance. Will was going to be the only auditor in the offices of the town of Rosedale.
In addition, DB&H had been auditing the company for the last four years and they have encountered several issues relating to cash management. As a result of this, the auditors had issued several recommendations for the improvement of handling cash receipts and disbursements every year and most of them were disregarded.
Jessica Randle who was the assistant clerk of the Court for the town of Rosedale was the wife of Nacho who was Will’s great friend and also his long-time friend. This posed familiarity threat to the independence of the audit work.
Being the first audit assignment he handled alone, Will faced many challenging situations.
Of all the documents he traced or vouched, Will found that 90% of them had no problems but the other 10% had some supporting documents or signature missing. The explanation obtained for those anomalies were that, the person who was normally responsible for those records was sick or on vacation and so some records were not filed properly (Guy, Alderman & Winters 1999). In addition, whenever there was a misstatement, it was both unintentional and immaterial.
The work of ticket revenues followed the same pattern. Of the 20 ticket revenues selected, 18 were paid by check, credit card or money order while the rest were paid cash. One of the two cash payments did not appear to have been made from that day’s bank deposit. One cash receipt was not banked that day. A check on the possible deposit later in the week revealed that no deposit was actually made.
A ticket marked as paid in cash in the receipt book but not showing in the bank deposit raised a lot of eyebrows. The ticket showed as paid in Sheriff‘s computer and the daily receipts voucher.
The attempt to include particular ticket revenue in the next day’s deposit raised suspicion. The explanation that the ticket fell from the drawer and was never noticed also fuelled suspicion
Jessica’s tendency to work until late hours was a source of suspicion.
Will found a suspicious penned letters in blue ink which was written by his friend on the deposit slip
The entry in the receipt book in black ink and the envelope in blue ink caused suspicion. They ought to have been completed the same time.
Cash receipt dated November 16, 2005 but recorded as paid with money printed in 2006 raised a great deal of suspicion.
- DB&H had been auditing the accounts of the town of Rosedale for the last four years and had never experienced any problems. The audit firm also had a good relationship with the mayor and the financial staffs of the municipality. This implies that the auditor was likely to get all the information he deemed necessary for the audit work. The municipality was small in size and therefore had a small number of activities. It is also likely that the systems adopted were not very complex and would not render the audit work difficult.
Will should have obtained correspondences from the client’s bank so as to confirm the actual bank balance as well as ascertain the date at which the deposits were made. In addition, Will should have compared cash receipts for the current period with those of the previous periods and obtain explanation for any material differences. Will should also have assessed the effectiveness of internal controls regarding authorization of banking.
Auditors’ independence as provided for by the generally accepted auditing standards
The generally accepted auditing standards require that the auditor must ensure that he remains independent in fact and appearance municipality ( Byrnes, McNamee, Brady,Lavelle & Palmeri 2002).
Independence in appearance refers to the way the auditor is being viewed by the general public. This boosts the confidence of the users of the audited financial statements. This is achieved through ways such as; avoiding long relationship between the auditor and the client. It can also be achieved by avoiding taking audit engagements in an organization where the auditor has financial interest or has a close member of his family working in the client’s company.
The code of professional conduct addresses the issue of personal client relationships with the auditor (Bazerman, Morgan & Loewenstein 1997). This is because personal relationships between the auditor and the client threaten auditor’s independence which is the cornerstone of any audit engagement. If the auditor’s independence is threatened, it becomes difficult for the auditor to approach the audit engagement with the required objectivity and this might have serious repercussions to both the auditor and the client. The reliability of audited financial statements is highly dependent on the degree of the auditor’s independence and so the higher the auditor’s independence the higher the reliability of the audited financial statements.
Auditor’s independence in appearance refers to the perception of the auditor in his work by the users of the financial statements such as investors and shareholders. Auditor’s independence in mental attitude refers to the ability of the auditor to arrive at independent audit decisions even in the circumstances where his position is likely to be compromised or his independence is perceived to be threatened (AICPA, 1983). Even if the auditor is independent in mental attitude, some factors may make him not appear independent.
In this case, Will’s independent is highly jeopardized because of factors such as personal relationships with the client’s staff. In addition, the audit firm has not been paid for the services it rendered in the past and therefore appeared sympathetic to its client. The audit firm, DB&H has also been auditing this client for a considerably long period of time. All these factors make it hard for Will to report objectively about the operations of the client’s business.
The factor that plays the greatest role in determining auditor’s independence is the auditor’s is the financial interest in the client’s business.
The profession should put in place stringent standards to ensure that auditors are distanced from any form of financial interest in the client’s business. In addition, stiff measures such as revocation of practicing certificates should be put in place so as to ensure the auditors perform their work in the best interest of client and the general public.
The evidence in support of Jessica’s position includes; the ticket was marked as paid cash in the receipt book as well as in the Sheriff’s computer.
When Jessica was asked why the ticket was not showing on the bank deposit, she seemed unsurprised and demonstrated confidence that everything was right. In addition, she was ready to give explanations about the possible causes of the mishap some of which included the ticket being mixed together with the cash not banked. Jessica was also forthright in assuring Will that the ticket will be recovered from wherever it had been misplaced. True to her words, she engaged in thorough search of the ticket and eventually got it and gave it to Willy.
However, it is quite suspicious how the cash deposit had fallen in between the cabinet vault and went unnoticed even the following day. In normal circumstances the money ought to have been locked up in the cabinet waiting banking the following day. In addition, it is clear that at the end of the day the assistant clerks would check the receipt book and prepares the voucher which is sent to Sheriff’s office for the update of all the tickets paid in any particular day. The assistant clerks are the ones who prepared the deposit slip for any cash or check payment and eventually make the deposit. This created a big room for misappropriation of cash.
Internal controls
Maintenance of a cashbook and its daily update was much necessary. In addition, daily reconciliation of bank’s position with the cashbook position was equally important. This would help to reveal all the banked deposits and unbanked money at the end of the day. The cashbook and daily receipt book should be maintained by independent persons. Preparation of the bank deposit slip should have been done by an independent person who was not involved in the recording of receipts or payments. Banking should have been made at regular intervals so to ensure that no cash was held by the receiving clerk. Rotation of duties of the receiving clerks should have been emphasized and a comparison made of the collections made by different clerks Customers should have been encouraged to pay through non-cash means such as credit cards or bank transfers and obtain a valid receipt upon every payment made in the organization.
The auditors analyzed the degree of co-operation obtained from the clerk of the organization as well as the type of representation obtained from the staffs of the organization.
The auditors also took into consideration the statistical sampling techniques used as well as the sample size of various items being audited.
The auditors considered the materiality levels of the fraud detected. They also considered the impact of the detected fraud on the overall organization and in particular the effect on its going concern (Guy, Alderman & Winters 1999).
The auditors took into consideration the degree of misstatement and assessed various levels of qualifying the auditor report. This qualification includes; adverse, except for and disclaimer opinion.
The auditors indicated all the weaknesses discovered in the internal control systems of the organization and gave recommendations of how these weaknesses could have been counteracted.
Pressures faced by auditors in their auditing work
This was Will’s first engagement on his own at DB&H and therefore his work would be reviewed. This means that Will did not have full confidence in the work and even if he detected certain frauds, he would not trust his competence. This made him make numerous consultations from his colleague whom he believed had a vast knowledge and experience about such engagements.
Auditors face many pressures while dealing with misappropriation of assets or fraudulent financial reporting. These pressures include; increase in auditor’ exposure to criminal and civil liabilities. In most cases, fraudulent financial reporting is supported by complex systems which the auditors have little knowledge about. These systems make it very difficult for the auditor to effectively audit transactions thereby making it hard for them to make an informed opinion. In other cases, the management of the client’s business might engage in a scheme so as to defraud the client. These schemes include insider dealings and they are difficult to detect.
Due to the above reasons, the auditor might issue an unqualified report while in an actual case he ought to have issued a qualified one. This exposes him to both criminal and civil liabilities.
One of the alternatives is to ignore the fraud detected in the ticket. The consequences of this would include; successive perpetration of frauds and eventually collapse of the organization. This would in turn expose the audit firm to criminal and civil liabilities as well as jeopardize the audit firm’s reputation.
Another alternative is to request the assistant clerk to pay the misappropriated money and escape legal action and whistle blow. The consequences of this would include; falsification of records so as to cover the stolen funds. This may also involve “creative accounting “so as to conceal the frauds.
Conclusion
Auditor’s independence is crucial in any audit engagement since it boosts the confidence of the users of the audited financial statements (Feldstein, 2002). It is therefore imperative that auditors appear to be independent and maintain independence in mental attitude so as to make the audited financial statements reliable to the users and also avoid liabilities. Where the auditors’ independence seems to be under threat, he should resign from the assignment.
References
American Institute of Certified Public Accountants (AICPA) (1983). Audit Risk and Materiality in Conducting an Audit. Statement on Auditing Standards No. 47. New York, NY.
Bazerman, M. H., Morgan, K. P. & Loewenstein, G. F. (1997). “The impossibility of auditor independence.” Sloan Management Review. Summer: 89-94.
Byrnes, N., McNamee, M., Brady, D., Lavelle, L. & Palmeri, C. (2002). “Accounting in crisis.” Business Week. January 28: 44-48.
Caswell, B. & Allen, C. (2001). “The engagement team approach to independence.” Journal of Accountancy 191 (2): 57-63.
Feldstein, D. ( 2002). “New SEC trading ruling may be insiders’ defense.” Houston Chronicle. January 21 (A): 1.
Guy, D. M., Alderman, C. W, & Winters, A. J. (1999). Auditing. 5th Edition. Fort Worth, TX: The Dryden Press.