What courses of action should the auditor consider pursuing when the results of the MUS sample are unacceptable, in other words, when the total estimated misstatement exceeds the tolerable misstatement?
Respond to the ethical judgments required based on the following scenarios.
Scenario 1. Assume you have collected a sample using MUS and that you have evaluated that sample to calculate a total esti- mated misstatement of $213,500. Prior to sampling, you set tolera- ble misstatement at $215,000. What is the implication of the fact that estimated total misstatement is very close to the tolerable mis- statement threshold? What does the closeness of these dollar amounts imply with regard to whether the accounts receivable amount requires downward adjustment? Using the ethical decision making framework from Chapter 4, develop an appropriate course of action to take, assuming the following possibilities:
a. You think that the accounts receivable balance is fairly stated because the misstatement is below the tolerable misstatement amount, but you are not entirely convinced of the soundness of your judgment given how close the estimate is to the tolerable misstatement.
b. You collect a larger sample size. You send out 10 more accounts receivable confirmations and find two more overstate- ments, totaling $88,000. Your senior tells you that the client has agreed to write down those two specific accounts receiv- able. He says that because of this agreement, you should disre- gard these overstatements for purposes of making a conclusion about the accounts receivable balance in total.
Scenario 2. Assume the same facts as in Scenario 1, but now assume that your senior tells you he has decided to increase the tol- erable misstatement amount to $250,000. His rationale for this change is that the client is in good financial health and has rela- tively strong internal controls. What is the implication of the change in tolerable misstatement amount with regard to whether the accounts receivable amount requires downward adjustment?
Academic Research Case
Using the ethical decision making framework, develop an appropriate course of action to address this situation.
Scenario 3. Assume that the pattern of errors that you have detected in the sample is the same as that was uncovered, in other words, five audit differences. Notice that for nearly all of those cases, the book value was greater than the audited value. What is management's incentive with regard to potential misreporting associated with accounts receivable (or other assets)? Assume that this pattern of overstatements has become routine on this engagement during the past several years. What does this trend potentially reveal about management? What are the ethical implications of this trend? What should you do?