Question

You are a staff associate at a major public accounting firm and graduated from college two years ago. You are working on an audit for a small, non-profit religious publishing firm. After performing tests on the royalty payables system, you discover that for the past five years, the royalty payable system has miscalculated the royalties it owes to authors for their publications. The firm owes almost $100,000 in past due royalties. All of the contracts with each author are negotiated differently. However, each author’s royalty percentage will increase at different milestones in books sold (i.e., 2% up to $10,000 and 3% thereafter). The software package did not calculate the increases, and none of the authors ever received their increase in royalty payments. At first you can’t believe that none of the authors ever realized they were owed their money. You double check your calculations and then present your findings to the senior auditor on the job.

Much to your surprise, his suggestion is to pass over this finding. He suggests that you sample new additional royalty contracts and document that you expanded your testing and found nothing wrong. The firm’s audit approach is well documented in this area and is firmly based on statistical sampling. Because you had found multiple errors in the small number of royalty contracts tested, the firm’s approach suggested testing 100% of the contracts. This would mean (1) going over the budgeted time/expense estimated to the client; (2) possibly providing a negative audit finding; and (3) confirming that the person who audited the section in the years past may not have performed procedures correctly.

Based on the prior year’s work papers, the senior auditor on the job performed the testing phase in all of these years just before his promotion. For some reason, you get the impression that the senior auditor is frustrated with you. The relationship seems strained. He is very intense, constantly checking the staff ’s progress in the hope of coming in even a half-hour under budget for a designated test/audit area. There’s a lot of pressure, and you don’t know what to do. This person is responsible for writing your review for your personnel file and bonus or promotion review. He is a very popular employee who is “on the fast track” to partnership. You don’t know whether to tell the truth and risk a poor performance review and jeopardize your future with this company, or to tell the truth, hopefully be exonerated, and be able to live with yourself by “doing the right thing” and facing consequences with a clean conscience.

1. What would you do as the staff associate in this situation? Why? What are the risks of telling the truth for you? What are the benefits? Explain.

2. What is the “right” thing to do in this situation? What is the “smart” thing to do for your job and career? What is the difference, if there is one, between the “right” and “smart” thing to do in this situation? Explain.

3. Explain what you would say to the senior auditor, your boss, in this situation if you decided to tell the truth as you know it

Answer 1

Ans 1. The finding of fraud or miscalculation did deliberately or by oversight is a mistake itself. It is not mentioned that for how many years the senior auditor is working with the firm. I would not like to become the party to the fault committed. From the reaction of the senior auditors and his suggestion indicates that he was aware of the situation. The authors who were supposed to get the royalty after the sale of the books at the percentage of 2% for 100000 number of books sold and then 3 %. The authors were never intimated about the actual number of their books sold.

There is no risk in telling the truth and bringing it into the notice of the seniors and only to the senior auditor but also to the organization, the organization is a religious organization. As the difference amount is not withdrawn, it is been shown as a miscalculation, It is better to bring it to light. Honesty is very important in any field.

2. In this situation where our own staff is concerned instead of following the wrong advice or suggestion given by the seniors, it is better to bring this mistake in the light and bring it to the notice of the board. This can be the testing stage maybe they wanted to check the integrity and honesty of the auditors who are assigned this job. The right and smart way to handle the situation would be with the permission of the board it is advisable to intimate the authors with an apology letter, and settle it. Anyway till this point as no author has asked for the extra royalty it shows they are ignorant about the fact. Instead of blaming anyone resolve the situation.

3. The senior auditors' act shows an act of negligence by oversight or intentionally is not clear. The base of calculation as mentioned in the para was based on the prior years work paper all these years, this shows an act of negligence on part of the senior auditors that tried to check the calculations. He was on the fast track to partnership and a popular employee does not mean that his mistake should be covered only because he was responsible for writing the review for promotion and bonus. The amount concerned is not paid to the authors and it never shows that the amount is withdrawn, that means it is a case of negligence and not amounting to cheating, The best way to have a solution is to make the auditor report as per the norms, and seeking apology, let the senior auditors put his case in front of the board, and their decision will be the milestone, their decision of making payments or hiding the truth will be in their hands the junior auditor has done the duty honestly and truthfully.