Question

Case 4-4 A Potential Threat to Professional Judgment?

Katy Carmichael was just promoted to audit manager in the technology sector at PwC. She started at PwC six years ago and has worked on a number of the same client audits for multiple years. She prefers being placed on client audits year over year as she believes her knowledge about the client grows each year, resulting in a better audit. Public accounting firms, like PwC, do this as it provides continuity between the firm and the client and often results in a more efficient (less costly) audit as well. Katy was thrilled to learn that she would be retaining three of her prior audit clients, including what she considers her favorite client (DGS- Drako Gaming Solutions) to audit. While she has not developed true friendships with the employees at those three clients, she does consider them good people. If she were not their auditor she would be very pleased to call them her friends. In fact, she greatly respects the senior management at DGS and likes the company enough that she has thought of going to work there on a number of occasions if she were ever to leave PwC. In describing the management of DGS to a friend, she stated they are as dedicated to their employees and minimizing their impact on the environment as they are to increasing shareholder value. She likes their culture, their people, and the games they produce and believes it would be a great place to work. The audit planning for DGS’s next audit is about to begin. As is common practice with all audits, each member of the PwC audit team is asked to fill out a questionnaire about any type of relationship (personal, business, or financial) they might have (or any other member of the engagement team might have) with the client company, any of their custom- ers, suppliers, employees, or direct family members of their employees. There is no direct question which specifically addresses Katy’s feelings toward the client and their management. As manager, Katy will be meeting with the PwC compliance partner assigned to DGS to go through the completed questionnaires to ensure there were no threats to independence and objectivity thereby hopefully ensuring no subordination of judgment would occur on the audit.

Questions

1. Identify any potential threats to judgment you think could exist based on the facts of the case?

2. Thinking back to the biases discussed in Chapter 2, what biases might the identified threat(s) make Katy more susceptible to and why?

3. This chapter discussed a link between the KPMG Professional Judgment Framework and Cognitive Processes specifically identifying four tendencies: availability, confirmation, overconfidence, and anchoring. How might Katy’s feelings about the client exacerbate any or all of these tendencies? Provide specific examples of how these tendencies or biases might affect the audit?

4. Is Katy obligated to discuss her feelings about DGS with the compliance partner when they meet? If so, what should she say? Do you think the compliance partner should remove Katy from the audit? Explain.

5. What safeguards would you recommend to Katy and/or PwC to maintain integrity, professional skepticism, objectivity, and independence throughout this audit?

Answer 1

1. Identify any potential threats to judgment you think could exist based on the facts of the case?

An auditore should in his perfomace display Integrity, Objectivity and independence during the course of audit. However when an auditor is associated for long time in an audit engagement the following potential threats are notices:

a) Business, financial, employment and personal relationship

b) Independence and integrity of auditor becomes as challange when associated for long time with Client.

c) When an auditor associates for long time with client it may happen client may influence with fee/remunartion, policy evaluation, to siphon off... Gifts etc.

2. Thinking back to the biases discussed in Chapter 2, what biases might the identified threat(s) make Katy more susceptible to and why?

An auditor should in his perfomace display Integrity, Objectivity and independence during the course of audit.Since Katy is their for more than 6 years and is being exended for another term of 3 year this may impact the audit owing to her proximit to the staff etc; A few of the instanses:

a) Overconfidence - Owing to long assocition with the client she may have false notion of skill, self belief/talent.

b) Self Serving - since for long associated she became self serving and though publicly not recorded but if the staff were not employees then there might be chance of become friends. which is not good for independent judgement.

c) It may happen that the decission might be influenced when the information/reports are presented without being judgement on the facts.

3. This chapter discussed a link between the KPMG Professional Judgment Framework and Cognitive Processes specifically identifying four tendencies: availability, confirmation, overconfidence, and anchoring. How might Katy’s feelings about the client exacerbate any or all of these tendencies? Provide specific examples of how these tendencies or biases might affect the audit?

Availability - Since Katy is for long time as an auditor. She might have the accessibility of information which she can use for presentation of report rather thad doing   authoritative analysis of the facts of the current situation with that of old ones. Simply depending on past methods

Confirmation - When consistent information is received, it may happen that she may not put more weight on the information and blindly depending on her previous beliefs.

Overconfidence - Owing to long association she might overestimate her own abilities to perform the audit task or might not carry out accurate diagnosis or other judgements and decisions for proper reporting.

Anchoring - she might be succumbed to the calculations presented managements estimates.

4. Is Katy obligated to discuss her feelings about DGS with the compliance partner when they meet? If so, what should she say? Do you think the compliance partner should remove Katy from the audit? Explain.

Yes Katy is obligate to discuss her feelings about DGS. She should tell the kind of relationship she is continuing with the staff. Yes the compliance partne should remove Katy from audit to maintain Integrity, Objectivity and independence of audit.

5. What safeguards would you recommend to Katy and/or PwC to maintain integrity, professional skepticism, objectivity, and independence throughout this audit?

a) Katy should not maintain any type of relationship (personal, business, or financial) that might have influence in conducting the audit and reporting the same to the management.