Question & Answer: In his capacity as an audit senior, B spent the last day of the financial year performing stocktake observation procedures. His assignme…..

In his capacity as an audit senior, B spent the last day of the financial year performing stocktake observation procedures. His assignment that day included taking test measurement at a client’s grain silo in a small country town. B had assessed grain stocks on two previous audits and was the senior-in-charge in this audit.

B’s observations of the quality if grain in the silo fell 10% below the client’s records. B’s attention was drawn to the discrepancy in the two measurements of what was in the silo because, in his judgement, such a gap was significant enough to be material. The resulting difference between stock as reported by the client and the audited amount was enough to cause a significant drop in net profit. B documented his findings in the work papers and proposed an adjusting entry for the difference.

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Question & Answer: In his capacity as an audit senior, B spent the last day of the financial year performing stocktake observation procedures. His assignme…..
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Upon investigating the matter further, B determined that a discrepancy in the gain stocks had also surfaced two months previously. The quantity of grain as reported by a government inspector at that time was lower than that on the client’s records. The difference in the stock valuation, however, was not as great as that in B’s tests. Still no adjustment to the client’s record was made. This information was also documented in the audit work papers

Prior to discussing the discrepancy with the client, B told F, the audit partner, about the problem. F, who had substantial experience in the industry, advised B that this would be a sensitive issue with the client. She also pointed out that grain stocks are notoriously difficult to measure, with the potential for errors as large as 10%. F promised that she would handle the matter personally and therefore told B not to discuss the discrepancy with the client. The audit partner kept the stock work papers.

After completion of the field work, B returned to the office to wrap up his work on the audit engagement. The stock audit work papers were still not in the file. Upon B’s inquiry, F handed him a new set of work papers.These work paper which has been dated as of the audit date, had been signed off by F and substantiated the book amount. B’s subsequent questioning of the partner revealed that F had personally performed additional work on the grain inventory after the client’s year end. Based on her own evidence gathering, the partner had substituted her own work papers for the documents. An unqualified opinion was subsequently issued.

1. What are the ethical issues and fundamental principles that need to be considered?

2. Consider alternative courses of action and recommend what B should do.

NB: fundamental principles are Integrity, Objectivity, Professional competence and due care, confidentiality, and professional behavior

NB: Determine the appropriate course of action that is consistent with the fundamental principles identified

Expert Answer


Q1: What are the ethical issues and fundamental principles that need to be considered?


a. Here, there is a significant difference in the valuation of stock which is shown in the books and which is in actual. It shows that the principle of materiality and validity has been violated. Therefore, it is the case of misstatement of financial facts and figures.

b. Moreover, Auditor F stated that she will handle the matter personally as well as changed the set of work papers which shows the violation of the principle of integrity and competency because as an Auditor you should examine the records and reports objectively and with due care to professional competence without any personal interest and biasedness.

Q2 Alternative course of action for Auditor B

Solution: Looking to the principle of objectivity and competency, first of all, the Auditor B should warn Auditor F and should report the significant difference in context to quality and value of stock and its impact on profitability in the report. Looking to the principle of integrity and materiality, the Auditor must issue a qualified report which shows the errors and fraud in the accounts of clients.

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