Write a 5 pages Audit case analysis paper

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Write a 5 pages case analysis paper. The case question is in the textbook on pg 112 case 4-29. (i will upload below). Also the format should follow the essay that is on pg 82.

1. define the Dilemma

2. Relevant Facts

3. What is the ethical issue

4. Who is effected? And how?

5. Identify the alternative

6. Identify the consequences

7. Appropriate action

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Rationalizing Unethical Behavior There are two primary reasons why people act unethically: The person's ethical standards are different from those of society as a whole, or the person chooses to act selfishly. Frequently, both reasons exist. Person's Ethical Standards Differ from General Society's Extreme examples of people whose behavior violates almost everyone's ethical standards are drug deal- ers, bank robbers, and larcenists. Most people who commit such acts feel no remorse when they are apprehended because their ethical standards differ from those of soci- ety as a whole. There are also many far less extreme examples when others violate our ethical values. When people cheat on their tax returns, treat other people with hostility, lie on resumes and employment applications, or perform below their competence level as employees, most of us regard that as unethical behavior. If the other person has decided that this behavior is ethical and acceptable, there is a conflict of ethical values that is unlikely to be resolved. The Person Chooses to Act Selfishly The following example illustrates the differ- ence between ethical standards that differ from general society's and acting selfishly. Person A finds a briefcase in an airport containing important papers and $1,000. He tosses the briefcase and keeps the money. He brags to his family and friends about his good fortune. Person A's values probably differ from most of society's. Person B faces the same situation but responds differently. He keeps the money but leaves the brief- case in a conspicuous place. He tells nobody and spends the money on a new ward- robe. It is likely that Person B has violated his own ethical standards, but he decided that the money was too important to pass up. He has chosen to act selfishly. A considerable portion of unethical behavior results from selfish behavior. Political scandals result from the desire for political power; cheating on tax returns and expense reports is motivated by financial greed performing below one's com- petence and cheating on tests typically arise from laziness. In each case, the person knows that the behavior is inappropriate but chooses to do it anyway because of the personal sacrifice needed to act ethically. Resolving Ethical Dilemmas overstated departmental revenues as a means of receiving a larger bonus is an ethical dilemma. Continuing to be a part of the management of a company that harasses and mistreats employees or treats customers dishonestly is an ethical dilemma, especially if the person has a family to support and the job market is tight. There are alternative ways to resolve ethical dilemmas, but care must be taken to avoid methods that are rationalizations of unethical behavior. The following are rationaliza- tion methods commonly employed that can easily result in unethical conduct: Everybody Does It The argument that it is acceptable behavior to falsify tax returns, cheat on exams, or sell defective products is commonly based on the rationalization that everyone else is doing it and therefore it is acceptable. If It's Legal, It's Ethical Using the argument that all legal behavior is ethical relies heavily on the perfection of laws. Under this philosophy, one would have no obliga- tion to return a lost object unless the other person could prove that it was his or hers. Likelihood of Discovery and Consequences This philosophy relies on evaluating the likelihood that someone else will discover the behavior. Typically, the person also assesses the severity of the penalty (consequences) if there is a discovery. An example is deciding whether to correct an unintentional overbilling to a customer when the customer has already paid the full amount. If the seller believes that the customer will detect the error and respond by not buying in the future, the seller will inform the cus- tomer now; otherwise, the seller will wait to see if the customer complains. Formal frameworks have been developed to help people resolve ethical dilemmas. The purpose of such a framework is to help identify the ethical issues and decide an appropriate course of action using the person's own values. The six-step approach that follows is intended to be a relatively simple approach to resolving ethical dilemmas: 1. Obtain the relevant facts. 2. Identify the ethical issues from the facts. 3. Determine who is affected by the outcome of the dilemma and how each person or group is affected. 4. Identify the alternatives available to the person who must resolve the dilemma. 5. Identify the likely consequence of each alternative. 6. Decide the appropriate action. An illustration is used to demonstrate how a person might use this six-step approach to resolve an ethical dilemma. Bryan Longview has been working six months as a staff assistant for Barton & Barton, CPAs. Currently he is assigned to the audit of Reyon Manufacturing Company under the supervision of Charles Dickerson, an experienced audit senior. There are three audi- tors assigned to the audit, including Bryan, Charles, and a more experienced assistant, Martha Mills. During lunch on the first day, Charles says, “It will be necessary for us to work a few extra hours on our own time to make sure we come in on budget. This audit isn't very profitable anyway, and we don't want to hurt our firm by going over budget. We can accomplish this easily by coming in a half hour early, taking a short lunch break, and working an hour or so after normal quitting time. We just won't enter that time on our time report." Bryan recalls reading the firm's policy that working hours and not charging for them on the time report is a violation of Barton & Barton's employment policy. He also knows that seniors are paid bonuses, instead of overtime, whereas staff are paid for overtime but get no bonuses. Later, when discussing the issue with Martha, she says, "Charles does this on all of his jobs. He is likely to be our firm's next audit man- ager. The partners think he's great because his jobs always come in under budget. He rewards us by giving us good engagement evaluations, especially under the cooperative attitude category. Several of the other audit seniors follow the same practice." Ethical Dilemma ETHICAL DILEMMAS OBJECTIVE 4-2 An ethical dilemma is a situation a person faces in which a decision must be made Resolve ethical dilemmas using about the appropriate behavior. A simple example of an ethical dilemma is finding a an ethical framework. diamond ring, which necessitates deciding whether to attempt to find the owner or to keep it. A far more difficult ethical dilemma to resolve is the following example. It is the type of case that might be used in an ethics course. • A man was near death from a rare blood disease. There was one experimental drug that the doctors thought might save him, but the man was not admitted into the free experimental trial. The drug had recently been developed by a start- up pharmaceutical company. The drug was expensive to make, but the company was charging twenty times what it cost to make and develop. The sick man's wife went to everyone she knew to borrow the money to pay for the drug, but she could only get together about $10,000, which is half of what it cost. She told the company that her husband was dying and asked that they sell the drug for a lower price or let her pay later. But the company said: "We discovered the drug and need to make money for our shareholders who have invested in its develop- ment." The wife became desperate and broke into the treatment center to steal the drug for her husband. What do you think about the wife's actions? Auditors, accountants, and other businesspeople face many ethical dilemmas in their business careers. Dealing with a client who threatens to seek a new auditor unless an unmodified opinion is issued presents an ethical dilemma if an unmodified opin- ion is inappropriate. Deciding whether to confront a supervisor who has materially 80 Part 1 / THE AUDITING PROFESSION Chapter 4 / PROFESSIONAL ETHICS 81 Resolving the Ethical Dilemma Using the Six-Step Approach Relevant Facts There are three key facts in this situation that deal with the ethical issue and how the issue will likely be resolved: 1. The staff person has been informed that he will work hours without recording them as hours worked. 2. Firm policy prohibits this practice. 3. Another staff person has stated that this is common practice in the firm. Ethical Issue The ethical issue in this situation is not difficult to identify. • Is it ethical for Bryan to work hours and not record them as hours worked in this situation? Who Is Affected and How Is Each Affected? There are typically more people affected in situations in which ethical dilemmas occur than might be expected. The following are the key persons involved in this situation: Who How Affected Bryan Being asked to violate firm policy. Hours of work will be affected. Pay will be affected. Performance evaluations may be affected. Attitude about firm may be affected. Martha Same as Bryan. Charles Success on engagement and in firm may be Hours of work will be affected. Barton & Barton Stated firm policy is being violated. May result in underbilling clients in the current and future engagements. May affect firm's ability to realistically budget engagements and bill clients. May affect the firm's ability to motivate and retain employees. Staff assigned to May result in unrealistic time budgets. Reyon Manufacturing May result in unfavorable time performance in the future evaluations. May result in pressures to continue practice of not charging for hours worked. Other staff in firm Following the practice on this engagement may motivate others to follow the same practice on other engagements. Bryan's Available Alternatives • Refuse to work the additional hours. • Perform in the manner requested. • Inform Charles that he will not work the additional hours or will charge the ad- ditional hours to the engagement. • Talk to a manager or partner about Charles's request. • Refuse to work on the engagement. • Quit working for the firm. Each of these options includes a potential consequence, including possible termi- nation by the firm. Consequences of Each Alternative In deciding the consequences of each alterna- tive, it is essential to evaluate both the short-and long-term effects. There is a natural tendency to emphasize the short term because those consequences will occur quickly, even when the long-term consequences may be more important. For example, con- sider the potential consequences if Bryan decides to work the additional hours and not report them. In the short term, he will likely get good evaluations for cooperation and perhaps a salary increase. In the longer term, what will be the effect of not report- ing the hours this time when other ethical conflicts arise? Consider the following simi- lar ethical dilemmas Bryan might face in his career as he advances: • A supervisor asks Bryan to work three unreported hours daily and 15 unreported hours each weekend. • A supervisor asks Bryan to initial certain audit procedures as having been per- formed when they were not. • Bryan concludes that he cannot be promoted to manager unless he persuades assistants to work hours that they do not record. • Management informs Bryan, who is now a partner, that either the company gets an unmodified opinion for a $40,000 audit fee or the company will change auditors. • Management informs Bryan that the audit fee will be increased $25,000 if Bryan can find a plausible way to increase earnings by $1 million. Appropriate Action Only Bryan can decide the appropriate option to select in the circumstances after considering his ethical values and the likely consequences of each option. At one extreme, Bryan can decide that the only relevant consequence is the potential impact on his career. Most of us would believe that Bryan is an unethical person if he follows that course. At the other extreme, Bryan can decide to refuse to work for a firm that permits even one supervisor to violate firm policies. Many people would consider such an extreme reaction naive. Most CPA firms have policies such as an anonymous hotline to report unethical behavior and provide employees with men- tors and other more formal methods of communication to help staff resolve ethical questions. . SPECIAL NEED FOR ETHICAL CONDUCT IN PROFESSIONS Our society has attached a special meaning to the term professional Professionals are OBJECTIVE 4-3 expected to conduct themselves at a higher level than most other members of society. Explain the importance of ethical For example, when the press reports that a physician, clergyperson, U.S. senator, or conduct for the accounting CPA has been indicted for a crime, most people feel more disappointment than when profession. the same thing happens to people who are not labeled as professionals. The term professional means a responsibility for conduct that extends beyond sat- isfying individual responsibilities and beyond the requirements of our society's laws and regulations. A CPA, as a professional, recognizes a responsibility to the public, to the client, and to fellow practitioners, including honorable behavior, even if that means personal sacrifice. The reason for an expectation of a high level of professional conduct by any profession is the need for public confidence in the quality of service by the profession, regardless of the individual providing it. For the CPA, it is essential that the client and external financial statement users have confidence in the quality of audits and other services. If users of services do not have confidence in physicians, judges, or CPAs, the ability of those professionals to serve clients and the public effectively is diminished. It is not practical for most customers to evaluate the quality of the performance of professional services because of their complexity. A patient cannot be expected to evaluate whether an operation was properly performed. A financial statement user cannot be expected to evaluate audit performance. Most users have neither the competence nor time for such an evaluation. Public confidence in the quality of professional services is enhanced when the profession encourages high standards of performance and conduct on the part of all practitioners. 82 Part 1 / THE AUDITING PROFESSION Chapter 4 / PROFESSIONAL ETHICS 83 Required 2. Contel, CPA, advertises in the local paper that his firm does the audit of 14 of the 36 largest community banks in the state. The advertisement also states that the aver- age audit fee, as a percentage of total assets for the banks he audits, is lower than any other CPA firm's in the state. 3. Baker, CPA, approaches a new audit client and tells the president that he has an idea that could result in a substantial tax refund in the prior year's tax return by applica- tion of a technical provision in the tax law that the client had overlooked. Baker adds that the fee will be 50% of the tax refund after it has been resolved by the Internal Revenue Service. The client agrees to the proposal. 4. Jon Davis is a former partner at Davis, Harrison, Smith. He left the firm to work for an audit client of DHS. Since Davis was the only expert in the firm on not-for-profit clients, DHS pays him as a consultant when they have questions related to their not- for-profit audit engagements. 5. Able, CPA, owns a substantial limited partnership interest in an apartment build- ing. Frederick Marshall is a 100% owner in Marshall Marine Co. Marshall also owns a substantial interest in the same limited partnership as Able. Able does the audit of Marshall Marine Co. 6. Finigan, CPA, does the audit, tax return, bookkeeping, and management services work for Gilligan Construction Company. Mildred Gilligan follows the practice of calling Finigan before she makes any major business decision to determine the ef- fect on her company's taxes and the financial statements. Finigan attends continuing education courses in the construction industry to make sure that she is technically competent and knowledgeable about the industry. Finigan normally attends board of directors meetings and accompanies Gilligan when she is seeking loans. Mildred Gilligan often jokingly introduces Finigan with this statement, "I have my three busi- ness partners--my banker, the government, and my CPA, but Finny's the only one that is on my side." Required Discuss whether the facts in any of the situations indicate violations of the AICPA Code of Professional Conduct. If so, identify the nature of the violation(s). 4-29 (OBJECTIVES 4-2, 4-7) Barbara Whitley had great expectations about her future as she sat in her graduation ceremony in May 2015. She was about to receive her Master of Accounting degree, and next week she would begin her career on the audit staff of Green, Thresher & Co., CPAs. Things looked a little different to Barbara in February 2016. She was working on the audit of Delancey Fabrics, a textile manufacturer with a calendar year-end. The pressure was enormous. Everyone on the audit team was putting in 70-hour weeks, and it still looked as if the audit wouldn't be done on time. Barbara was doing work in the prop- erty area, vouching additions for the year. The audit program indicated that a sample of all items over $20,000 should be selected, plus a judgmental sample of smaller items. When Barbara went to take the sample, Jack Bean, the senior, had left the client's office and couldn't answer her questions about the appropriate size of the judgmental sample. Barbara forged ahead with her own judgment and selected 50 smaller items. Her basis for doing this was that there were about 250 such items, so 50 was a reasonably good propor- tion of such additions. Barbara audited the additions with the following results: The items over $20,000 contained no misstatements; however, the 50 small items contained a large number of misstatements. In fact, when Barbara projected them to all such additions, the amount seemed quite significant A couple of days later, Jack Bean returned to the client's office. Barbara brought her work to Jack in order to apprise him of the problems she found and got the following response: "Gosh, Barbara, why did you do this? You were only supposed to look at the items over $20,000 plus 5 or 10 little ones. You've wasted a whole day on that work, and we can't afford to spend any more time on it. I want you to throw away the schedules where you tested the last 40 small items and forget you ever did them. When Barbara asked about the possible audit adjustment regarding the small items, none of which arose from the first 10 items, Jack responded, "Don't worry, it's not material any- way. You just forget it; it's my concern, not yours." a. In what way is this an ethical dilemma for Barbara? b. Use the six-step approach discussed in this chapter to resolve the ethical dilemma. 4-30 (OBJECTIVE 4-2) Ann Donnelly is a senior audit manager in an East Coast office of a public accounting firm. Her prospects for promotion to partner are excellent if she con- tinues to perform at the same high-quality level as in the past. Ann was recently married, and she and her husband bought a large home in a prestigious neighborhood. Ann just returned from a vacation and was immediately called into an audit partner's office for a discussion related to one of her publicly traded audit clients. This audit engage- ment, which had been completed with an audit report issued several months prior, had been selected for a PCAOB inspection and the partner is concerned. PCAOB inspections can be stressful for the primary engagement partner and often result in the identification of audit deficiencies by the PCAOB, which are then discussed with the audit firm. The partner is concerned he will look bad and may even face penalties from the firm if there are serious deficiencies identified. Under PCAOB auditing standards, all working paper documentation for an audit of a publicly traded client should be completed within 45 days of the audit report release date. Any working papers added to the file after that date should be dated accordingly, be signed by the preparer, and include a note as to the purpose of the added working paper. The audit engagement team is not allowed to modify or delete original documentation included in the working papers. In the current meeting between Ann and the partner, the partner on the audit engage- ment feels they need to provide further support for one of the judgmental audit areas on the audit engagement in order to avoid scrutiny from the PCAOB, and that they also need to go through the working papers and ensure that all work was appropriately signed off by the manager and partner. The partner suggests to Ann that she include an additional memo to support their conclusion on the judgmental audit area in question, that she date this memo as if she had completed it at the time she and the staff originally did the work, and that she ensure all required signatures are in the working papers. Ann reminds the partner this is in violation of the PCAOB auditing standards; however, the partner assures Ann that no one will know and they can avoid possible penalties that would result if they do not ensure that their audit engagement will pass inspection. After all," the engagement partner reminds Ann, "you will soon be considered for promotion to partner and you would not want a negative inspection outcome on a prior engagement to stand in your way of making partner." Use the six-step approach discussed in this chapter to resolve the ethical dilemma. Required 112 Part 1 / THE AUDITING PROFESSION Chapter 4 / PROFESSIONAL ETHICS 113
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Audit Case Analysis
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Audit Case Analysis
Ethical Dilemma

Ethical dilemmas, in this case, arise when Barbara is expected to practice and uphold
accounting standards, but her boss is reluctant on observing the regulations. Therefore, she is left
wondering whether she should include the 70-hours-week like everybody else in the firm or not.
At the same time, she is expected to audit the program by obtaining the sample from Jack, she
does not find him, nor does he return her calls, thus she decides to make 50 smaller item sample
reports. After the compilation of the report, jack does not agree and asks her to throw away the
report and consider fewer items with few details. Therefore, it is essential for one to note that an
ethical dilemma is a situation, which a decision must be made about the appropriate behavior.
Employees are faced with ethical dilemmas in the place of work especially when dealing with
supervisors who are not committed to the goals and moral values. These individuals are forced
to forge documents and incorporate information that is available to meet the deadline for report
submission. Barb
Relevant facts
There are four critical facts in this situation that influence ethical issues and ways in
which the dilemma can be resolved. One, the Barbara is forced to forge the program samples to
meet report submission deadline. Secondly, the pressure was enormous. Everyone on the audit
team was putting in 70-hour-end, and the audit looked as if would not complete on time. Third...

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