Audit decisions sometimes come down to a trade-off between satisfying one set of stakeholders at the expense of others. In the example in Figure 17-4 and 17-5, an auditor is forced to choose between making her superiors and the client happy or doing what she feels is appropriate to the goal of an audit: to attest to the fairness of management's assertions.

Consider each of the following brief situations:

a. An auditor discovers a small employee fraud involving theft of power tools in the service department of a TV/VCR repair operation.

b. An audit manager knows that client management expects all auditors assigned to their engagement to be CPAs, but because of short staffing the manager is considering assigning to the engagement a new hire who has not passed the CPA exam.

c. An auditor discovers that one of his friends and co-workers on an engagement has been using the client's equipment for personal business (i.e., long-distance telephone calls, photocopying).

d. While reviewing the workpapers of an audit on which he worked several years ago, a senior auditor discovers several procedures had been recorded as completed, although he knows they were not. The person who completed the workpapers is now his superior.

e. An auditor knows for a fact that a friend of hers who works for another firm and who represents himself as a CPA has not completed the appropriate mandated continuing education for his CPA certification.

f. The senior partner in charge of an audit engagement is told that his firm will be fired from the audit if he goes forward with his plan to give the company a qualified audit report.

g. An audit manager discovers that controls over the payables process of her client are poor and cannot be relied on. In fact, the controls have been that way for several years, but the manager approved them in years past based on inadequate tests of controls.

h. A junior member of an audit firm discovers that a senior partner in the firm has been adding billable hours to the client bills in an attempt to boost revenue.

For each of the preceding situations, 

(1) identify the major stakeholders (besides the individual making the decision), 

(2) identify and discuss the alternatives the subject faces, paying special attention to the ethics involved in the decision, 

(3) choose and defend a course of action.

Figure 17-4

Figure 17-5

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Scenario: Jane Yardley is a senior accountant in the firm of Varnish & Co. Jane is considered a rising star in the firm and has been privately assured that she will be promoted to manager in the next two months and will receive a hefty raise. Based on this knowledge, Jane has recently acquired some of the trappings of a successful professional a new house, an expensive car, and a membership to a prestigious local country club. Jeff Smalley is a partner in the firm of Varnish & Co. and has been in charge of many of the engagements on which Jane has worked. He has a tremendous respect for Jane's capabilities and has recently requested that she be assigned to his newest client, Brown Brothers Inc. Brown Brothers is a manufacturer of women's clothing that is sold through moderate- to low-price department stores, mostly under house brands. The company has been au- dited by another firm for a number of years and always received a standard unquali- fied opinion. The company has been profitable in the past but last year the company incurred a small loss. Due to changing fashions and an incorrect guess that miniskirts would be big sellers, the company has accumulated a significant amount of inventory in its warehouses. As a result, the company realizes it may have to report a large loss this year. Jane has been assigned to the audit of inventory for the current year. Upon completion of the planned audit work, Jane concludes that inventory should be written down by as much as 50 percent to reflect lower of cost or market. She has prepared a memo with documentation and included it in the workpapers. Jeff, upon reviewing the inventory work, calls Jane to his office and states that he disagrees with her conclusions and does not think that a write-down is necessary; he tells Jane to replace her memo with a more upbeat memo which concludes that the inventory is properly valued at cost. In support of his position, Jeff points out that the company has always been able to dispose of in- ventory with minimal loss and that a discounter is likely to purchase the inventory in bulk. Furthermore, the company has indicated that it will change auditors rather than record the write-down. What should Jane do?