The auditor assesses management integrity as a potential indicator of inherent risk, particularly as it relates to the potential for fraud. Although the assessment of management integrity takes place on every audit engagement, it is a difficult and subjective task. This task requires that the auditor exhibit professional skepticism; this can be difficult because it is human nature to trust people we know!

1. Define management integrity and discuss how management integrity influences the auditor's decisions regarding the type of evidence to gather on an audit and the evaluation of the evidence.
2. What are possible sources of evidence that the auditor can use in assessing management integrity?
3. Is it ethical for upper level management to refuse to correct an income-decreasing detected misstatement because doing so would cause the company to miss its analysts' consensus earnings forecast?
4. For each of the following management scenarios: (1) indicate whether you believe the scenario reflects negatively on management integrity, and explain why; and (2) indicate how the assessment would affect the auditor's planning of the audit.

Management Scenarios

1. The owner/manager of a privately held company also owns three other companies. The individual companies could be run as one combined company, but they engage extensively in related-party transactions to minimize the overall tax burden for the owner/ manager.
2. The president of a publicly held company has a reputation for being stubborn and having a violent temper. He fired a divisional manager on the spot when the manager did not achieve profit goals.
3. The financial vice president of a publicly held company has worked her way to the top by gaining a reputation as a great accounting manipulator. She has earned the reputation by being very creative in finding ways to circumvent FASB pronouncements to keep debt off the balance sheet and in manipulating accounting to achieve short-term earnings. After each short-term success, she has moved on to another company to utilize her skills.
4. The president of a small publicly held company was indicted on tax evasion charges seven years ago. He settled with the Internal Revenue Service and served time doing community service. Since then, he has been considered a pillar of the community, making significant contributions to local charities. Inquiries of local bankers yield information that he is the partial or controlling owner of several companies that may serve as a "shell" company whose sole purpose is to assist the manager in moving income around to avoid taxes.
5. James J. James is the president of a privately held company that has been accused of illegally dumping waste and failing to meet government standards for worker safety. James responds that his attitude is to meet the minimum requirements of the law; if the government deems that he has not, he will clean up. "Besides," he asserts, "it is good business; it is less costly to clean up only when I have to, even if small fines are involved, than it is to take leadership positions and exceed government standards."