Johnny, a CPA who is acting as the in-charge/senior on the audit engagement, works on the ABC Company audit, an existing firm client. Johnny works hard to complete this engagement along with his other engagements during the Spring busy season. The following Fall, the PCAOB notifies the firm of the inspection of the visit timing, schedule in a little over two weeks, and the selection of ABC Companys work papers.

Knowing that the PCAOB would be arriving soon to examine the ABC Company audit work papers, the manager and the partner review the work papers and refresh themselves on the details of the engagement. Johnny receives an email from the manager with a request for the paper version of the work papers from the file room. Johnny delivers the work papers to the managers office the Friday prior to the inspectors arrival on Monday.

On Friday, Johnny and the manager determine that the file is incomplete with respect to two key documents: a supporting worksheet for a key item and a final version of the signed engagement letter. Johnny reviews the work papers and cannot find the supporting worksheet. However, he does find an earlier version on his compute hard drive. At the managers direction, he prints out the worksheet on Friday. On Monday morning, Johnny adds the tick marks, initials, and backdates the work paper. This work paper is added to the file without any explanation for the late addition or the actual date it was added to the file.

Firm policy requires a signed engagement letter for all audits. The manager notes that the audit work papers do not contain an engagement letter that includes an original client signature. The manager contacts the client and request that Johnny follow up to obtain the document. Johnny exchanges emails with the corporate controller and arranges to have the letter delivered prior to 8:30 a.m. on the day of the inspectors arrival. The letter is inserted into the hard copy documents on Monday morning without documenting the true date of insertion or the reason why it is added. Johnny takes the complete, revised work papers and delivers them to the PCAOB inspectors when they arrive.

1. What standards and principles of ethics did Johnny violate?

2. Should Johnny be sanctioned by the firm or the PCAOB? If so, how?