Problem
Question I
The financial vice president of a publicly held company has worked her way to the top by gaining a reputation as a great accounting manipulator. She has earned the reputation by being very creative in finding ways to circumvent FASB pronouncements to keep debt off the balance sheet and in manipulating accounting to achieve short-term earnings. After each short-term success, she has moved on to another company to utilize her skills.
i. Indicate whether you believe the scenario above reflects negatively on management integrity, and explain why.
ii. Indicate how your assessment in question one would affect the auditor's planning of the audit.
Question II
The PCAOB oversees all audit firms that audit public companies. The PCAOB recently barred (prevented) two former audit firm employees from auditing public companies, alleging they provided misleading documents to PCAOB inspectors who were evaluating the audit firm's work. The PCAOB said that shortly before its inspectors were to inspect one of the audit firm's audits, the two auditors created, backdated, and placed in the audit files a document concerning the valuation of one of the audit client's investments. One of the auditors allegedly authorized other members of the audit team to alter other working papers in advance of the inspection. The changes were not disclosed to the PCAOB. The audit firm indicated that the conduct of the two auditors had no impact on the client's financial statements or on the audit firm's audit conclusions.
Given that the auditors' conduct did not affect the client's financial statements or the audit firm's conclusions, why was this situation over audit documentation of concern to the PCAOB?