Small businesses are particularly vulnerable to fraud as they lack some of the same resources, like large companies have, to implement complete systems. Whether that be with internal controls, to making sure that they have enough annual financial audits. Small companies also have a lack of reporting as trust can be high in their employees, when employees are violating the given trust. Signs that possible fraud is more pronounced in small businesses could be because of employee frauds, accounting frauds, payroll fraud, or skimming. Employee frauds is an internal fraud which is committed against the company the person is working for. Accounting frauds is things like embezzling money, this is also an internal fraud. Payroll fraud is things like manipulating timecards or creating ghost employees. Skimming Is the practice of not recording the sale revenues and taking aside the money from the revenues in one’s own pocket.
11. Expressions that enable a CPA to build a defense should an audit wind up in the courtroom are “on a test basis”, “reasonable assurance,” “material,” “in all material respects,” and “assessing.” They can also use their opinions given whether that be qualified, adverse, or disclaimer. The expressions listed above are used to signal a reader about specific limitations of an audit report. From an ethical point of view these statements can make it feel like the auditors did not put in as much work as they should have. The phrase “reasonable assurance” for instance, means that the financial statements are not guaranteed to be free of material misstatements. If auditors use many of these phrases in their sentences how can any reader of the financial statements trust in the auditors that they did their job completely and thoroughly. It also makes one think of utilitarianism discussed back in Chapter 1 of our textbook. The questions that comes to mind is are the actions that the auditor did during an audit straightforward, and morally correct? Did the auditors give into the clients wishes? Were the auditors really telling the truth?
16. Skeptical judgement happens when an issue is recognized by the auditor which may need a proper attention and require efforts for that issue. It is followed by an action. Skeptical action is acting on the problem that is recognized. It happens when auditors behave in a different way according to what judgment was made. This can only happen once judgment is made. The four components of Rest’s model of ethical decision making are moral sensitivity, moral judgement, moral focus, and moral character. These components are processes that take place for moral behavior to occur. Skeptical judgement and action are linked to this model through decision making. The decision-making finds that there is usually a difference between what is found to be ethical versus what is done by the auditors. For instance, an auditor might decide to take longer on an audit and go over their budgeted time to ensure that every aspect has been covered. Rest’s model here allows one to use professional ethics which transitions into a skeptical judgement and action. A skeptical action is the result of a skeptical judgement, but every time there is a judgement there is not always a result of an action.
25. In a workplace, retaliation is described as any adverse action taken by an employer or management against an employee for his or her actions that were against the employer. A wrongful termination is a form of retaliation. With that in mind, Dennis was wrongfully terminated for reporting irregular activities by his employer. He was treated as an outcast and was later fired for the reason of poor performance, and unfortunately, he lost the suit of a wrongful termination against his employer. In my opinion, Dennis did say the right thing. He blew the whistle regarding the acts of his employer. He acted ethically by not participating in the fraud and bringing it to attention. By also telling the recruiter that he felt like the company was not a good growth path was bringing to light that he does not agree with companies that commit fraud. Although the events that took place after this happened makes it seem like he is the bad guy, whistleblowing polices should protect him and his new employer should see that he acted in an ethical way.
Case 5-10
1. I think that the AD&A is a good idea, and that it should comment both on the audit, and the company’s financial statement. The AD&A expands the current form of an audit report which can essentially clear up any confusion. The AD&A can ensure that the views in the audit report are not limited to an opinion that the statements being audited represent a fair picture of the financial condition of the company. The AD&A can enable auditors to point out critical matters which they come across during the audit. By being able to add such details to both the audit and financial reports, it can help financial statement users understand what exactly is going on. This works especially if they do not have a background in accounting. It is also an alert for the company to ensure that there is correctness and completeness of their audit and financial statements. It allows the company to review everything that has been going on and find mistakes that might have been overlooked. I think that what is talked about above is enough commentary. Sometimes talking about too many things can get confusing, and possibly turn out hurtful for the company or shareholders.
2. An unmodified opinion means that auditors believe that all matters have been appropriately presented and disclosed in the financial statements. The opinion is given when the auditor has enough evidence to believe that the financial statements give a true and fair view. Our book states that “the auditing profession recognizes its obligation to look for fraud by being alert to certain red flags, assessing the control environment of the organization, passing judgment on internal controls, and consider audit risk and materiality when performing an audit.” In general, and specifically to this case, it is possible that an audit firm can render an unmodified opinion and have no responsibility for detecting and reporting a financial fraud. An auditor’s job is to not dig for fraud. If they find fraud, then it must be reported. If the laws are followed, and they feel like the financial statements present reasonably and fairly it is ok. Although I do believe that for EY, and for all auditors, if an issue is missed it may be acceptable to from a legal standpoint. That does not mean, however, that it is ok for auditors to not take responsibility for their actions. As stated in the case, EY determined that the company did not accurately account for the possibility of higher refunds. Groupon also blamed EY for the admission of the internal control failure to spot material weaknesses. I think EY did fail here, but by owning up to it and talking about how they went about analyzing the financials’ they can make a case on why the weakness was missed.
3a. It is important for a firm such as EY in this case with Groupon to fully understand the nature of risk when a company conducts its business online by being able to ensure that the auditor will spot material weaknesses. This in turn will ensure that there is no internal control failure. Having a business that is ran mostly online, means that internal controls need to be set in a strict manner and as tight as possible. An online company also seems to be at high risk financially. If EY completely understands the nature of risk, it will then be able to properly asses the risks of material misstatements and determine the susceptibility of Groupon’s financial statements to misstatements and weaknesses. Not to mention that since they are the ones providing the opinion on the financials they need to understand how the business is run to be able to assess it properly.
3b. Internal auditors can play a vital role in dealing with such risks as they are employees of a company being audited. In their position they can provide an objective evaluation of the operations of the company. They usually have a good understanding on how the company is ran and can assess risks related to thee company like corporate governance, online payment risks, internet safety risks, etc. They can also insure that internal control processes are operating effectively.
3c. External auditors should adapt their risk assessment procedures for social media/networking clients by looking into a company’s strategy, governance compliance, security, internal controls, and any policies put into place. By being trained to look out for things like that, and having a deeper understanding of it all, can help insure that auditors are being able to give reliable opinions when auditing financial statements. They can also spend more time auditing companies that are internet based and be able to adapt their risk assessment. They can do this by increasing their professional skepticism, communicate with employees of the company to learn about why transactions were made the way they were, and understand exactly how the company is ran.