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Financial audit Essay

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Generally, ethics refer to moral principles and values. Random House Webster’s College Dictionary notes that ethics are “the rules of conduct recognized in respect to a particular class of human actions or governing a particular group, culture, etc. ” An individual’s ethics generally define what that individual believes to be right and wrong. Professional ethics are typically expressed by a code of conduct adopted by an organization that represents a profession. Professions adopt such codes to encourage moral conduct among their members.

Following is a list of the individuals involved in the AMRE case: Robert Levin, Chief Operating Officer Dennie Brown, Chief Accounting Officer Walter Richardson, Vice President of Data Processing Steven Bedowitz, Chief Executive Officer Mac Martirossian, Chief Financial Officer Edward Smith, audit engagement partner Joel Reed, senior audit manager My experience has been that students differ markedly in their assessments of the ethics of these individuals. In particular, students generally have difficulty arriving at a consensus assessment of Martirossian’s conduct in this case.

I believe that the lively debate typically produced by this exercise is healthy for students since such debates allow them to begin developing or “fleshing out” their attitudes regarding important ethical issues and concepts. 2. The executives involved in the AMRE fraud agreed in a consent order to refrain from violating federal securities laws in the future. In addition, Robert Levin and Dennie Brown forfeited funds they realized from sales of AMRE stock during the fraud. Levin also paid $1. 8 million to the federal government, including a $500,000 fine for insider trading.

Finally, Levin and Steven Bedowitz contributed approximately $9 million to a settlement pool to resolve a large class-action lawsuit. Most students conclude that the AMRE executives who participated in the fraud were appropriately punished. Their actions were motivated by greed and self-interest and they paid a heavy price for their indiscretions. The two auditors involved in this case, Edward Smith and Joel Reed, were prohibited from being assigned to audits of SEC registrants for nine months. Again, students typically find that this punishment was appropriate given the apparent mistakes made during the AMRE audits.

These mistakes included failing to adequately test the computerized lead bank, allowing AMRE personnel to observe certain inventory sites, accepting client explanations without applying sufficient audit procedures, and failing to require the client to disclose large and suspicious period-ending accounting adjustments in the financial statements. The SEC issued a separate enforcement release criticizing Martirossian for his failure to take appropriate measures upon learning about the fraud. Students frequently disagree with the SEC’s criticism of Martirossian.

Many of them view him as an ethical person who just happened to be in the wrong place at the wrong time. It is important to point out to students that it is not unusual for accountants to find themselves in these types of ethical dilemmas. Martirossian’s experience provides an excellent example of the potential consequences an accountant may face if he or she violates the Code of Professional Conduct. 3. Among the alternative courses of action available to Martirossian were the following: a. Aid in the cover up of the fraud. b. Demand that the executives involved disclose the fraud to the auditors.

If they refused to comply, report the fraud to the SEC. c. Report the fraud to the auditors and to the Board of Directors immediately. d. Secretly report the fraud to the auditors. e. Resign his position with AMRE, Inc. Probably the best course of action for Martirossian would have been to demand that the executives disclose the fraud to the auditors. If they refused, Martirossian should have considered disclosing the fraud directly to the SEC. This action would have resulted in Martirossian upholding his professional responsibilities as a CPA.

Although he may have lost his job, he would have avoided being sanctioned by the SEC. Most important, this course of action would have prevented innocent parties, such as potential AMRE investors and creditors, from being harmed by the fraudulent scheme. 4. The relevant accounting concept in this context was the matching principle. The matching principle requires that expenses be matched with the revenues they produce. A cost can be deferred–treated as an asset–when it is expected that the cost will produce future economic benefits (generally, revenue).

It seems reasonable that a portion of AMRE’s advertising costs benefited future periods and, thus, could be appropriately deferred. Nevertheless, AMRE’s policy of deferring all of the advertising costs related to unset leads was very aggressive and probably resulted in the booking of assets that would provide no future benefits for the company. 5. Listed next are key audit risk factors that were present during the 1988 and 1989 AMRE audits. a. AMRE’s management had a strong incentive and desire to maintain the company’s stock price at a high level. b.

AMRE’s unset leads increased dramatically during 1988. c. The company’s inventory also increased significantly during 1988 and increased much more rapidly than the company’s sales. d. The efforts of AMRE’s executives to influence important audit planning decisions should have been of concern to the auditors. e. The percentage-of-completion accounting method was an unusual method to apply to AMRE’s installation jobs since those jobs typically required only four to ten days to complete. f. AMRE had several large and unusual fourth-quarter adjusting entries in 1989. .

Martirossian’s secret meeting with the AMRE auditors should have caused them to question the integrity of the client’s financial statements. When taken together, these items suggest that the overall audit risk for the AMRE audits was relatively high. Most of these risk factors were discovered by Price Waterhouse or were apparent to the audit firm. For example, the audit planning memo for the 1988 audit identified the large increase in inventory as a key risk factor and called for an increase in the number of inventory observation sites.

Likewise, the AMRE audit partner originally requested that the company disclose the large period-ending adjustments in its 1989 10-K. Although the auditors identified these risk factors, it appears that they failed to adequately consider them during the performance of fieldwork. For example, company executives convinced the auditors to allow client personnel to observe several of the inventory sites selected for observation at the end of 1988.

During the 1989 audit, client management persuaded the auditors not to require disclosure of the large fourth-quarter adjustments in AMREs financial statements. Why did the auditors apparently defer to AMRE’s executives in several situations and fail to adequately question their decisions in others? Possibly, the auditors simply succumbed to client pressure in each of these instances. During the 1989 audit, the auditors may have relied too their detriment on Martirossian, a former colleague, to inform them of any major problems in AMRE’s financial statements.

Whether Price Waterhouse was justified during the 1988 audit in agreeing to allow client personnel to observe the physical counts at certain inventory sites is a matter of professional judgment. Apparently, members of the audit team did not believe that the client’s request posed a major problem–that is, did not result in a material scope limitation, otherwise they would not have agreed to it. Client management should not be allowed to influence key audit decisions such as sample size determinations, assignments of auditors to given areas of the audit, and the types of audit tests applied to specific accounts.

Generally, any time a client request would prevent an auditor from satisfying the requirements of the third standard of fieldwork–obtaining sufficient competent evidential matter to support his or her audit opinion, that request should be denied. 7. In most situations, the key management assertion for an expense item is the completeness assertion. That is, auditors are generally concerned that a client may attempt to understate expenses. However, in this case the fourth-quarter write-offs in 1989 were initiated by AMRE management.

When management voluntarily recognizes a large and unusual expense item, an auditor may want to consider the possible motives underlying management’s decision. Certainly, an auditor in such a case will want to investigate the completeness assertion, but the existence/occurrence assertion should also be examined by the auditor in such circumstacnes. In recent years, many large firms have taken “big bath” write-offs to improve their chances of returning to a profitable or more profitable position in the near future.

In fact, the management assertion of most concern to Price Waterhouse regarding the 1989 fourth-quarter write-offs may have been the “presentation and disclosure” assertion. This assertion “addresses whether particular components of the financial statements are properly classified, described, and disclosed” (AU Section 326. 08). The large year-end adjustments that resulted in AMRE reporting a net loss for 1989 were clearly not adequately described in the company’s financial statements. 8.

Listed next are the key responsibilities an auditor assumes for quarterly financial information included in the footnotes to a client’s audited financial statements. Refer to AU Section 722 for a more detailed discussion of these responsibilities. a. The auditor should apply “review” procedures to the interim financial information. (Such procedures consist principally of inquiries of client personnel and analytical procedures. ) b. The auditor should ensure that the quarterly data are presented as supplementary information and that each page of the data is clearly marked as unaudited. .

If the results of the review procedures are satisfactory, the auditor does not need to modify his or her report on the audited financial statements to make reference to the review of the interim financial information. However, if the interim financial information does not appear to be in conformity with generally accepted accounting principles, including adequate disclosure, the auditor’s report should generally be expanded to address this issue.

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Financial audit. (2018, Sep 06). Retrieved from https://studymoose.com/financial-audit-essay

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