Question

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 Company’s 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 manager’s 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 manager’s 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?

Answer 1

As per Above question , we noticed couple of important point where Johnny a CPA who is acting as the in charge / senior on this audit assignment . We noticed that Johnny as well as Manager not very sincere about documentation or maintain proper working paper flow . They are trying to complete at the end just before PCAOB visit to review of ABC compny working paper . While reviewing file both identified that they have not covered proper documentation process in case of 2 key important matter – one point “ a supporting worksheet for a key Item and a final version of the signed engagement letter . To mange this gap , Johnny immediately find an earlier version on his compute hard drive , Johnny to meet deadline and submit tthe same before PCAOB review , Johnny filed the same nd tick mark on file as job has been completed . This case not accepted from Jhonny as CPA professional , Johnny ethically can not do that Johnny is being violated Audit documentation concept AS 1215 .

Audit documentation facilitated the planning , performance , and supervision of the engagement and with help of these , Auditor can review of the quality of the work. As per standard , for documentation purpose , the auditor should prepare and retain in connection with engagements conducted pursuant to the standard of the PCAOB .

Audit documentation should be prepared in sufficient detail to provide a clear understanding of its purpose . Audit documentation is the written record that provides the support for the representation in the auditors report and it must include :

1. Need to review that the engagement compiled with the standard of PCAOB
2. Auditor conclusion concerning on financial statement matter
3. Also need to see reconciliation of accounting records agreed with the financial Statement

Audit documentation must clearly demonstrate that the work has completed perfect way . This documentation help to understand who participate in the engagement and evaluate the audit work . Audit documentation must contain sufficient information to enable an experienced auditor .

With proper audit documentation , we can understand the nature , time extent of the procedures , performed , evidence obtained and final reached conclusion

Auditor shoud consider the following factors:

1. Nature of the auditing procedures
2. Risk of material misstatement
3. Accounting estimate require greater judgement

Documentation include test control , test of operating effectiveness ,

We noticed that Audit Engagement is one of the most important Audit document at the time of initial agreement . In this case we noticed that Audit Engagement letter was not Signed . Auditor not maintain proper audit documentation , they are not keeping Audit engagement signed paper in their working paper file

PCAOB audit is (non profit Organization ) being created by SOX . SOX 2002 to oversee the audit of pubic companies and other issues in order to protect the Interest of Investors .

In this scenario , Johnny and manager trying to submit paper not in proper documented way, No signature , last year paper updated into current documentation , Audit engagement leter without signature . Audit engagement is one of the major document . They are missed to take signature for the same and maintain documents in back dated . Overall noticed that ethically they are not followed proper auditing standard , process , documentation ,