Scenario:

Gold Star Auditors has almost completed an externalaudit of a large, important and long-term regular client, Blue Skies Air Freightcompany. Suresh is a recently recruited, qualified accountant in Gold Star Auditors team. He is given the task of auditing Blue Skies Air Freight because it is a long-standing client and previous audits have always gone smoothly.

However, near the end of the external audit, Suresh has discovered an 'irregularity': a large cash payment has been recorded but with no name for the receiver. The corresponding invoice is handwritten on notepaper, with a signature that is scribbled and impossible to identify.

Suresh reports this 'irregularity' to his supervisor Annika. She is under pressure to finish the said external audit project by close of business that afternoon, so she advises Suresh to quickly seek an explanation from Blue Skies Air Freight's finance manager, Huang. However, Annika reminds Suresh that it is now the final day to complete the external audit project. The audit team at Gold Star Auditors operates under strict time/cost pressures to conclude each project. Annikas need to get the external audit signed off by the CEO, before close of business.

Annika warns Suresh: "Blue Skies Air Freight is a long-standing client. I would be very surprised if there was anything unethical or illegal about that payment. I have been auditing Blue Skies Air Freight for the last five years and there's never been any problem. Huang is an friend from university and I'm sure he wouldn't approve of anything unethical or illegal. So please don't upset Huang with any unneccesary questions."

Suresh decides to ask Huang for a quick explanation. Huang replies: "Hey Suresh, nobody here at Blue Skies Air Freight can remember what that payment was for, or who signed it. You need to recognise that 'real world' audits are sometimes a bit messy. Not all audits end in a nice neat way. Get on with finishing it."

Suresh tells his supervisor Annika what Huang actually said to him. Annika reluctantly agrees not to sign-off the external audit while Suresh is still investigating the irregularity but she warns him again to consider carefully if theirregularity is a potentially serious professional and/or legal issuethat requires delaying the sign-off.

Therefore, Suresh must now make a professional judgement. He can choose to:

1. extend the external audit beyond the agreed project time-frame, to clarify:what that large cash payment was for? Who signedthe handwritten note? And who signed the money?
2. alternatively, Suresh could simply get the audit signed off by the end of that Friday afternoon, with no further probing, then enjoy the weekend.

Required:

The relevant Professional Skill to apply for this scenario isscepticism: probing the authenticity of an 'irregular' accounting entry and questioning the veracity (truthfulness and accuracy) of Huang's explanation.

Question 1: Identify the main professional, regulatory and legal issues that Suresh is concerned about, that are causing him to be sceptical about accepting the authenticity (truth and validity) of that large cash payment to the unnamed receiver for the invoice handwritten on notepaper, with a signature that is scribbled and too hard to identify.

Question 2: Advise Suresh on the best professional way to solve the problem of his scepticismabout the handwritten note's authenticity - versus the pressure to finish auditing Blue Skies Air Freight by the close of business on that Friday afternoon. (5 marks)

Question 3: Advise Annika on the correct actions that she should take, as a mid-level leader, to maintain the professional conduct standards of auditors and protect the reputation and goodwill of Gold Star Auditors. (5 marks)

Question 4: As you have learnt, auditor independence must be maintained in external auditor - client relationships. Any failure to maintain independence creates risks.

Suresh remembers that he studied Risk Management during the MPPA601 at TIIS. He researches the lectures given by Dr Philip Booth, finds the TARA risk management model, and decides to apply it tomanage the risks of negative outcomesfromthe external audit of Blue Skies, including the risk of damaging his professional reputation.

Showhow Suresh could use the TARA model to make the best decisions and discussany potential consequences for the key stakeholders who may be affected:

Transfer:

Avoid:

Reduce:

Accept: