Case Study: Professional Ethics in Auditing

Sarah is a senior auditor at a reputable accounting firm. During an audit engagement, Sarah discovers evidence suggesting potential fraud by the client's management. The evidence indicates that the management has manipulated financial records to inflate revenues and conceal liabilities, which could materially misstate the company's financial position. Sarah is faced with a dilemma: should she report her findings to the client's management as required by her firm's policies, or should she escalate the matter to the appropriate authorities, knowing that it could damage the firm's relationship with the client?

Despite feeling conflicted, Sarah recognizes her ethical obligations as an auditor. She understands that her primary responsibility is to maintain integrity and objectivity in the audit process, even if it means confronting difficult situations. Sarah decides to escalate the matter to her firm's ethics committee and consults with senior partners to ensure that the appropriate actions are taken.

The firm's ethics committee conducts a thorough investigation into Sarah's findings, corroborating the evidence and concluding that the client's management has indeed engaged in fraudulent activities. Recognizing the seriousness of the matter, the firm decides to terminate its relationship with the client and report the fraud to the relevant regulatory authorities.

Sarah's decision to uphold professional ethics and integrity in auditing not only safeguards the interests of stakeholders but also upholds the reputation and credibility of her firm.

Objective Question:

What is the most appropriate course of action for Sarah to take in response to her discovery of potential fraud during the audit engagement?

a$)$ Report the findings to the client's management and await their response.

b$)$ Consult with senior partners and escalate the matter to the firm's ethics committee.

c$)$ Ignore the evidence and continue with the audit engagement to avoid conflict.

d$)$ Confront the client's management directly to address the fraudulent activities.