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

1. There is a violation of ethical standard of integrity in the part of johnny.Integrity involves adhering firmly to a code of values. A person who refuses to make compromises in matters of principle has integrity. As per the integrity standard one must: (a) mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advice all parties of any potential conflicts of interest. (b) Refrain from engaging in any conduct that would prejudice carrying out duties ethically. (c) Abstain from engaging in or supporting any activity that might discredit the profession. (d) Contribute to a positive ethical culture and place integrity of the profession above personal interests. Johnny also violated ethical principle of honesty. Honesty means fairness and straightforwardness of conduct, It is the quality of being upright, having integrity, truthfulness, sincerity, frankness, and freedom from deceit or fraud.

2. The auditor should prepare and maintain working papers, the form and content of which should be designed to meet the circumstances of a particular engagement. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters. Johnny who undertook the audit work manipulates and misrepresented the audit work papers and engagement letter prior to the PCAOB audit. As the original documents were found to be missing, they inserted new work papers and engagement letter without showing the true date of insertion and the reason for doing it. The auditor should adopt reasonable procedures for safe custody of his working papers and should retain them for a period sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of records retention. After discovering the missing documents they could comply with AS 1215 either by not adding missing documents or adding them with proper notations. Their actions of manipulating the missing documents is against the professional ethics and will not be sanctioned by the PCAOB.