Question

I joined a Big Four accounting firm straight out of college a few years ago as a staff accountant. My first assignment on an audit engagement was a learning experience I would never forget; it was a practical lesson perhaps even more valuable than my newly minted accounting degree.

On our way to the client, Susan, a senior accountant and one of my new colleagues, cautioned me about the CFO. “He has a bit of a reputation,” she said, adding, “Let me know if you have problems. And don’t let him browbeat you!” That comment, as an introduction to my brand-new career, was just a little unsettling.

I was given what seemed to be a nice, safe task: testing routine journal entries, which involved selecting items from the population and examining the supporting evidence. I asked a clerk for some reconciliations and a little later, to my surprise, I got a call from the CFO himself to ask why we were working on “trivial items” as he called it.

“We hired you for the big picture, not this kind of stuff,” was his terse comment, and he hung up before I could respond.

We were under a tight deadline to get the audit completed, and after several days there was no sign of the reconciliations I’d requested. I talked to Susan and later Mike, the engagement partner.

When I finally received the reconciliations and tested them, I noticed a high volume of journal entries that even to my inexperienced eyes seemed a little out of the ordinary.

what should i do next

Answer 1

Here there is a clear risk of material misstatement as the journal entries are apparently out of the ordinary when the reconciliations are tested. In such a case you should clearly inform your colleague Susan about the situation and if necessary inform about this development even to Mike who is the engagement partner. Your audit firm will, most probably, go for a comprehensive evaluation of the company’s selection and application of significant accounting principles after this discovery. Your audit company will then determine whether the company’s selection and application of significant accounting principles are indicative of biases that could lead to material misstatements of the financial statements.

In this situation you will be asked to apply ‘professional skepticism’. It should be noted that professional skepticism is an attitude in which you will have to adopt a questioning mind and you will have to be alert to the conditions that you are facing here as it can indicate possible misstatement due to error or fraud. You will have to do a critical assessment of the audit evidence that is being presented to you here.