Question: Entry level auditing staff often inspects client records and documentation supporting

Entry-level auditing staff often inspects client records and documentation supporting accounting transactions in order to gain evidence about the appropriate application of the applicable financial reporting framework. One of these tasks involves comparing original client records of transactions to client reports that summarize those transactions. In this way, auditors gain assurance that the transactions used to construct the financial statements are complete and accurate. Here we report a case related to this task that is based on an actual situation. However, names have been changed to achieve confidentiality concerning audit firm personnel issues.
Elizabeth Jenkins was a staff auditor assigned to a large insurance client engagement. She was working on the portion of the audit concerning the client's claims loss reserves (reserves for future claims submitted by those insured by the insurance company). This reserve is analogous to the allowance for doubtful accounts of a company in the manufacturing or service sector. Essentially, the audit firm wants to provide assurance that the client's estimate of the amount of claims that will ultimately be filed is correctly stated on the balance sheet, with the appropriate write-off appearing on the income statement. Elizabeth was asked by the senior accountant on the engagement (Brett Stein) to tie out (in other words to compare) the client's claim loss reserve estimate (summarized on a large Excel worksheet) with the client's system-generated reports that provided the underlying data for the reserve estimate. The calculation is complex and involves inputs from several sources. Therefore, the tie-out process was very detail oriented and rather repetitive, involving a significant amount of time and patience to complete accurately. To demonstrate that she had compared the amount on the claims loss reserve Excel spreadsheet with that on the systemgenerated reports, Elizabeth was instructed to put a tick mark in both documents that would enable her senior to review her work.
Along with each tick mark, Elizabeth was instructed to write a short note that described whether the two amounts did or did not agree. Elizabeth proceeded through the task, inserting tick marks where appropriate and noting agreement in all cases between the spreadsheet and the system-generated report. Because Elizabeth was feeling pressed for time and was exceedingly bored with her task, she skipped many of the comparisons and simply inserted tick marks indicating agreement even though she had not compared the numbers. She rationalized her actions by telling herself that this client had good internal controls and she had never found disagreements between source documents in other areas of the audit in which she was involved. In the audit profession, this action is known as ghost tick marking.
After Elizabeth had completed the task, she moved on to other parts of the audit as instructed by Brett. Subsequently, Brett reviewed Elizabeth's work. During that review, he recomputed amounts on both the Excel spreadsheet and the system-generated reports. To his surprise, there were instances in which Elizabeth had noted agreement between the two documents when in fact the numbers were not the same.
Brett met with Elizabeth and asked her about what had happened.
She readily confessed to her actions. Brett counseled her that this behavior was unacceptable because it implies that audit work is being done when in fact the work is not being done. This puts the audit firm at risk because it provides inappropriate assurance that the client's records are accurate, when in fact they are not accurate. Elizabeth was embarrassed and remorseful and promised not to engage in ghost tick marking in the future. Brett noted the situation in Elizabeth's personnel records and notified the manager and partner on the engagement, along with relevant human resource personnel. The matter was fully documented in Elizabeth's personnel file.
During the course of the year, the supervisory audit firm personnel on all of Elizabeth's engagements were notified of her actions, and her work was subjected to more thorough review as a result. The firm noted no problems with the quality of Elizabeth's work during that time. During her annual review, she was again coached on the severity of her mistake. However, during the annual review process of all staff accountants, the firm did consider firing her based upon the mistake, but ultimately decided that her confession, remorseful attitude, and subsequent high-quality work merited that she retain her employment.
a. Try to put yourself in Elizabeth's position for a moment. Have you ever been tempted to do a low-quality job on some task that you considered mundane? Have you ever thought that your low-quality work would remain undiscovered?
b. Why is Elizabeth's misrepresentation of her work so important to the firm?
c. What did Elizabeth ultimately do right in this situation, once her misrepresentation was discovered?
d. Do you agree with the outcome? Do you think the firm was too lenient? Too harsh? What would you recommend the firm do in this situation? Use the framework for ethical decision making from Chapter 4 to help you arrive at a conclusion.

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  • CreatedSeptember 22, 2014
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