Mitch Jackson and Rosie Punter are part of the audit team for Hexagon Industries, a large manufacturing, private company client. The client’s year-end was December 31, 2022, the end of fieldwork date on the unmodified report was February 28, 2023, and the financial statements and auditor’s report will be released on March 9, 2023. The primary lender for Hexagon Industries, First Union Bank, requires that Hexagon be audited each year as a condition of borrowing funds.

Today is March 5, 2023, and Mitch and Rosie are working on assembling the audit file for archiving. Shortly before lunch, they receive an instant message through the firm’s intranet from Elizabeth Morgan, the partner on the Hexagon audit. She says to report to her office immediately as there has been a new development on the Hexagon audit.

Elizabeth informs Mitch and Rosie that she received a call from Hexagon’s CFO an hour ago. It was discovered that Hexagon’s controller and human resource director were embezzling funds through an elaborate payroll fraud. The CFO suspects the fraud has been going on for several years. Elizabeth says, “Eat a quick lunch, and then we are headed to Hexagon for a meeting with the CEO and CFO at 1:00 p.m.”

Required

a. Explain the auditor’s responsibilities for events that arise after the date of the audit report.

b. List the steps Elizabeth and her team should take regarding this situation.

c. Since fraud was discovered, what implication does that have for the client’s internal controls? Evaluate the effect of the discovered fraud on the work auditors performed on internal controls and the substantive procedures performed.