.
NSAIS-2nd year
Exercise 1
The ethical implications may include the small loan company failing. Due to David's
lack of participation in the company, mismanagement of the loan business is highly probable.
Thus, it may end up failing in the long run if David continues to put aside his responsibilities as
the owner. The employees may also end up working less efficiently and effectively because of
the lack of supervision. David himself, will also be at a disadvantage because his full
commitment to work will be affected. At the end of the day, he has to face the problems
regarding his loan company which may in turn affect his work as a lawyer and vice versa. One
way or another it won't be possible to fully commit to either of his work.
Exercise 2
I. Relevant Facts
Frank Doran is the senior audit manager for Cruz and Santos, CPAs. His
promotion to partner is already planned by the firm with the condition that he continues
to perform at the same high-quality level. Frank has been assigned to audit the Machine
International, one of Cruz and Santos’ most prestigious clients. He found out that the
company uses a revenue recognition method called “bill and hold” that has recently been
questioned by SEC. This method was used by the company for 10 years. There is a
conflict between his engagement partner and him in this matter. The engagement partner
concludes that the method used is appropriate, especially because the client does not file
with the SEC. Frank on the other hand, argues that the method used is appropriate in prior
years, but the new SEC ruling makes it inappropriate in the current year. The engagement
partner takes full responsibility for making the final decision if a legal dispute ever arises
with the condition that Frank will not include a statement in the working papers that he
disagrees with the partner’s decision.
II. Ethical Issue
Is it ethical for Frank Doran to disagree with the partner's decision about the audit
report that they will issue regarding Machine International or for him to not disclose his
findings of the violated rulings of the Security and Exchange Commission by Machine
International?
III. Who are affected? How each are affected?
a. Frank Doran
● He can't state that he disagrees with the decision of the partner.
● They may lose the client if he pushes through with his opinion.
● It may affect his future position in the firm.
● It may have a negative result and a bad impression of the partners of the firm.
● Attitude about the partner may be affected.
● The impression of the other staff to him may be affected and they may see him as
someone who doesn’t recognize other’s opinions.
b. Cruz and Santos, CPAs
● They may lose a big client.
● Engagement partners may create misstatements about the audit report.
● Partners may have barriers with each other and will create misunderstandings because
of different opinions.
● Because of the attitude that an engagement partner will always or often say that he/she
will be responsible for their audit reports, some staff may not drive their fear out and
will be afraid or will not mind to open up their suggestions and opinions.
c. Frank’s Partner
A misstatement may arise because of her opinion
Her opinion may create audit risk.
She will suffer and may lose her job in case a legal dispute arises
May not conclude the right assessment of the client's financial report.
May create a misunderstanding of how they conclude their report because of her
attitude towards the other auditors
d. Machine International
• The reputation of the company may be damaged
• They may face legal problems regarding their used of recognition method
e. SEC
One of the rulings may be violated
May not check the financial statement of the company and if they comply with
their rulings since it does not file to them
f. Users of Machine International Financial Statements
Investors of the company may think that Machine International has always a big
number of sales not knowing about its revenue recognition, which is the bill and
hold.
The overstatements of the sales may become a major factor in the decision
making of the managers for the company and they may not make an appropriate
decision for their future plans with these unrealistic sales.
IV. Frank’s Doran Alternative Solution
As a senior audit manager, it is his duty to review reports to ensure that your
opinions are correct and are based on sufficient evidence before reaching a
conclusion.
Notify the Machine International that their bill and hold revenue recognition is not
appropriate according to the new ruling of the Security and Exchange
Commission
Advice the Machine International to follow the SEC ruling, and modify its
revenue recognition before it can review by others that its sales are not its official
sales at the present time.
If it is proven that, based on sufficient evidence that the revenue recognition of
the Machine International was inappropriate, he should disagree with the opinion
of the engagement partner that the financial statements of the company do not
comply with the framework.
If the engagement partner insists on their opinion and conclusion, as Machine
International's financial statements were inappropriately wrong, he should refuse
to continue the engagement.
However, if there is insufficient evidence that the financial statements of the
Machine International were inappropriately done, Frank Doran should always
look towards all possibilities and listen to the partner's point of engagement.
V. Consequences of Each Alternative
If he works according to an auditor's code of ethics, it is very likely that he will
make a factual conclusion and, as a result, the audit report that will be appended
to the financial statement will have high assurance.
If Machine International is aware that its revenue recognition has been improperly
done, they may choose between rectifying their sales or to continue
with its invoice and support, however, the company's response to the auditor's
advice is unknown and as a major client, there will be a great risk that Cruz and
Santos, CPA lose their major client if the Machine International doesn’t like the
intention of the auditors to correct their mistakes.
The commitment partner may ask him to just agree that the revenue recognition of
the Machine International as appropriate, however, may also be liable in the event
of a legal dispute.
Frank Doran may not be able to conduct the audit and will not be able to correct
the inaccuracy of the customer's financial statement and financial information.
He may not be able to become a partner within a year or two if he continues to
disagree with his engagement partner.
VI. Appropriate Action
Frank Doran is the one who will choose if what action for him is ethical and what
appropriate decision he will take to make everything fall into his rightful places.
Because I don't think we're ethical for others, but it's ethical for someone else.
However, as an auditor, I think it's always fair to know the code of ethics that
must be followed not only by professional accountants but also external auditors
and others. I think it is right for Frank Doran to prepare a report regarding his
conclusions about the financial report of Machine International. Because it's not
just for his own sake, but for all shareholders, stakeholders, and other interested
parties that will use the financial statements of the company to know about the
doings of Machine International, as it is crucial in their decision making. Besides,
in making your decision, you should also consider all the factors that may affect
its business because it carries it with him as a senior audit manager, as well as its
employees in the team, they all should check every little detail to come up with an
appropriate conclusion that is rightly based on sufficient appropriate evidence.
