How to Make Auditing Textbook More Fun to Read
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SUMMARY
Three Homework Handouts are presented for use by instructors in undergraduate or graduate introductory audit courses. The Homework Handouts give students an opportunity to bridge the material they are learning in class to real-globe situations they may be facing in the auditing profession. The Homework Handouts focus on auditor switches, independence, ethical dilemmas, and PCAOB inspection reports. Students complete the Homework Handouts throughout a semester of introductory audit. After completing each assignment, students should be ready for grade discussion.
INTRODUCTION
In senior-level and graduate-level introductory audit courses, professors face a challenge in helping students bridge the cognition they are learning in form to bodily events from the auditing profession. Experiential learning can provide many benefits for students. Wright (2000, 124) posits that short-term experiential learning (which includes ascertainment) can "mitigate some of the drawbacks to long-term experiential exercises, but nevertheless elicit similar benefits." Lawson et al. (2014) recommend that accounting curricula should focus on students' long term careers. Liu, Yao, and Hu (2012) hash out improving ethics education in bookkeeping. Three Homework Handouts are presented in which auditing students are exposed to real-world situations that they may face at various points in their auditing careers. By observing these situations and addressing questions posed in the assignments, students volition be ameliorate prepared to make better ethical decisions and avoid similar mistakes in their own careers. These assignments will help students to bridge in-class learning to their professional responsibilities as auditors and help them to better fulfill those responsibilities.
Students will be set for in-class discussion afterwards completing the assignments. Homework Handout #1 is titled "Auditor/Management Responsibilities, Representation Letters, and Independence" and covers accountant independence (auditors' office to avoid managerial decisions) and management representation letters. Homework Handout #2 is titled "Ethical Dilemmas and the Code of Professional Deport" and covers ethical dilemmas faced by auditors and sanctions against CPAs for violating the Code of Professional Conduct. Finally, Homework Handout #3 is titled "PCAOB Inspection Reports" and covers the PCAOB Inspection Reports. The Homework Handouts are available for download as Word documents, please run into Appendix A.
Students reported that completing the Homework Handouts was a valuable learning experience. Students besides reported that the Homework Handouts were effective as a means of tying what they had been learning in class to bodily events in the accounting/auditing profession. Students found the Homework Handouts to be interesting, relevant to the audit course, and recommended that the Homework Handouts exist used in futurity inspect courses. Finally, students agreed that the Homework Handouts were effective for illustrating decisions that auditors might make, which can assistance them in making similar decisions.
The Homework Handouts described have been used in audit courses at three big public universities at which at that place is merely one introductory audit class offered. If instructors have different constraints or teach auditing over multiple courses, so the Homework Handouts are easily adaptable to fit instructors' needs. Also, if instructors would like students to spend more fourth dimension on discovering the audit profession, then ideas are presented to assistance instructors expand the assignments. The side by side department presents Homework Handout #one, #ii, and #3, respectively. The "Case Learning Objectives and Implementation Guidance" department presents Introducing and Assigning the Homework Handout, Grading, Classroom Implementation Problems, Show of Effectiveness, and Expanding the Assignments for each of the Homework Handouts following the cases.
THE CASES
Homework Handout #ane: Accountant/Direction Responsibilities, Representation Letters, and Independence
A New York Times article stated:
Molex, a maker of electrical components, said yesterday that its accountant, Deloitte & Touche, resigned Saturday afterwards the company refused to dismiss its chief executive and another officer. Deloitte had demanded that Joseph King, the chief executive, and Diane Bullock, who had been reassigned to treasurer from principal fiscal officer, be prevented from serving as officers while Deloitte completed its review of the company's quarterly financial report. Molex, based in Lisle, Ill., filed a delayed quarterly report with the Securities and Substitution Commission yesterday. ( New York Times 2004)
When in that location is an accountant modify for a Securities and Commutation Commission (SEC) registrant, the SEC Division of Corporate Finance Financial Reporting Manual, Section 4510, contains the requirement that the company is to file an 8-1000, Item 4.01 (SEC 2016). Turner, Williams, and Weirich (2005) state: "When an auditor is informed by a company that it has been terminated, or informs the company that it will no longer serve every bit the independent accountant, the auditor is required to transport a form letter of the alphabet directly to the Office of the Chief Auditor of the SEC. This letter must be sent within four business concern days, and is matched with the Form 8-G filings." Molex filed an eight-1000, Item iv.01, dated Nov 13, 2004 on November 18, 2004 describing the change in accountant. Molex filed an amended viii-1000 on December 1, 2004. Molex's auditor, Deloitte & Touche (Deloitte), sent a letter to the SEC in response to the 8-Grand, Item 4.01 that Molex filed on November 18, 2004. Deloitte'southward response alphabetic character can exist found in the Exhibit 16.one attachment to the amended viii-Yard filed by Molex on Dec one, 2004. You will read and analyze these documents to complete Homework Handout #1.
Later reading the documents, some of the deportment taken by Molex direction may pb you to ask: "Where is the accountant?" Molex is a case where the auditor was definitely present.
Requirements
Plough in answers to the following questions (limit your responses to ane typed page):
- (1)
What consequence led the auditors to inquire for the CEO and CFO to step down?
- (two)
Do you agree or disagree with the accountant's asking?
- (3)
Write a paragraph describing what leads y'all to your determination in (ii).
- (4)
Were there other questionable activities going on at Molex that you can ascertain from the 8-Ks? If there are, list them.
Make a decision on Requirement 2 and support it in Requirement three. If you do not feel comfy with your response in 3, then you may want to consider possible support for the alternate decision. Work on this assignment individually. The assignment is due i week from the day assigned. Come up set up for some class discussion on the assignment due date.
Background Material: Auditing Standards and Lawmaking of Professional Conduct Standard to Help You in Answering the Required Questions
PCAOB AS 1001, Responsibilities and Role of the Independent Auditors, one states the following:
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.02 The auditor has a responsibility to plan and perform the audit to obtain reasonable balls about whether the financial statements are costless of cloth misstatement, whether caused by mistake or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.
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.03 The financial statements are management's responsibility. The accountant's responsibility is to limited an opinion on the financial statements. Direction is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, initiate, record, process, and written report transactions (as well every bit events and atmospheric condition) consistent with management's assertions embodied in the financial statements. The entity's transactions and the related assets, liabilities, and equity are within the direct knowledge and control of management. The auditor's knowledge of these matters and internal command is limited to that acquired through the audit. Thus, the fair presentation of financial statements in conformity with generally accepted accounting principles is an implicit and integral role of management's responsibility. The contained accountant may brand suggestions about the form or content of the financial statements or typhoon them, in whole or in function, based on information from management during the operation of the audit. Withal, the accountant's responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them.
AU-C Section 580 (AICPA 2015) describes what management should include in the management representation letter. Paragraphs .ten, .11, and .14 incorporate managements' responsibility for written representations nigh "Training and Off-white Presentation of the Financial Statements," "Data Provided and Completeness of Transactions," and "Uncorrected Misstatements," respectively, as follows:
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.10 The auditor should request management to provide a written representation that it has fulfilled its responsibleness, as set out in the terms of the inspect appointment,
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a. for the preparation and off-white presentation of the financial statements in accordance with the applicable financial reporting framework; and
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b. for the design, implementation, and maintenance of internal control relevant to the training and fair presentation of financial statements that are costless from material misstatement, whether due to fraud or error.
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.11 The auditor should request management to provide written representations that
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a. it has provided the accountant with all relevant information and access, as agreed upon in the terms of the audit engagement, and
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b. all transactions have been recorded and are reflected in the financial statements.
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.fourteen The auditor should request management to provide written representations nigh whether it believes the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the fiscal statements as a whole. A summary of such items should be included in, or attached to, the written representation.
In the Code of Professional Acquit, ET Section 1.295.030 states that "If a member were to assume a management responsibility for an adjure client, the management participation threat would be and then significant that no safeguards could reduce the threat to an acceptable level and independence would be impaired."
Homework Handout #ii: Ethical Dilemmas and the Code of Professional Behave
In December 2012 the PCAOB issued Staff Audit Practice Warning No. 10. The Practice Alert states that "scheduling and workload demands tin put pressure on partners and other appointment team members to consummate their assignments besides quickly, which might lead auditors to seek inspect bear witness that is easier to obtain rather than show that is more relevant and reliable, to obtain less prove than is necessary, or to give undue weight to confirming evidence" (PCAOB 2012, vii).
Jay Hanson, former PCAOB Board Member, delivered a speech communication on March 28, 2014 at the Beta Alpha Psi Midwest Regional Coming together. He stated that "i of the biggest impediments to auditor skepticism…is the calendar. Public companies have filing deadlines to run across, and they are rarely missed. When they are missed, the consequences can be serious, including failing share prices and damage to investors. If potential issues are discovered late in the inspect process, or an issue is not resolved in a timely manner, auditors may feel pressure to cut corners. We accept seen information technology in inspections and enforcement matters: Auditors recognize that at that place may be a problem with management's estimates or conclusions simply let themselves to be talked out of doing anything virtually it" (Hanson 2014).
Ann Marie Fitzpatrick was affected past "scheduling and workload" demands. The PCAOB is involved in disciplinary proceedings against offending accountants. Read the disciplinary proceeding taken confronting Ann Marie Fitzpatrick, CPA. This can be found at: http://pcaobus.org/Enforcement/Decisions/Documents/12-14_Fitzpatrick.pdf/.
Requirements
Turn in answers to the following questions (limit your responses to one typed page):
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(1) Prior to making her decision, what were the ethical issues that Ann Marie faced?
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(2) Prior to making her conclusion, who would be affected by the outcome of the dilemma and how would each group or person be affected?
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(3) What were the alternatives bachelor to Ann Marie, prior to making her decision?
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(four) What were the likely consequences of each alternative listed in (3) to a higher place?
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(5) List the evidence regarding whether the Pennsylvania Country Board of Accountancy took disciplinary action against Ann Marie? If aye, what testify did you find? The URL for the Pennsylvania State Board of Accountancy website is: http://www.dos.pa.gov/ProfessionalLicensing/BoardsCommissions/Accountancy/Pages/default.aspx/.
Piece of work on this assignment individually. The assignment is due 1 week from the day assigned. Come ready for some class discussion on the assignment due engagement.
Homework Handout #3: PCAOB Inspection Reports
The PCAOB does yearly inspections of audit firms that audit 100 or more public companies. You are going to wait at the inspection for the Big 4 accounting firms for the year 2015 (the reports are dated 2016).
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If your final name starts with the letters A through J, then read the PCAOB Inspection Reports for Deloitte and PwC.
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If your last name starts with the letters K through Z, then read the PCAOB Inspection Reports for KPMG and Ernst & Immature.
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Make sure y'all select the firm and not their international affiliates (eastward.one thousand., KPMG and not KPMG Canada).
Requirements
Turn in answers to the following questions (limit your responses to ane typed page):
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(1) Section A of each written report lists a review of inspect engagements. For each accounting firm, list one inspect deficiency that yous recollect is the worst.
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(two) Listing why y'all think it is the worst.
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(3) At the end of the inspection, yous will notice the auditor's response to the PCAOB. Did they respond to the deficiency you thought was the worst? What was their response?
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(4) Finally, out of the two audit firms you looked at, who had the worst deficiency? What reasons led you to this conclusion?
Work on this assignment individually. The assignment is due one calendar week from the solar day assigned. Come up set for some form discussion on the assignment due date.
CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE
See Showroom 1 for an overview of the learning objectives that are associated with each Homework Handout.
Showroom one
Overview of Learning Objectives for Homework Handouts
Homework Handout #1: Auditor/Direction Responsibilities, Representation Letters, and Independence
Learning Objectives
The objectives of Homework Handout #1 include:
- (1)
introducing students or reviewing with the students management's responsibilities with regard to the fiscal statement and the accountant'south responsibilities;
- (2)
introducing students to or reviewing with students the direction representation letter of the alphabet and its importance;
- (three)
illustrating the importance of the Control Environment in a company;
- (four)
helping students make a decision about whether auditors are violating AICPA Lawmaking of Professional Conduct with regard to ET Section 1.200—Independence; and
- (5)
illustrating decisions that auditors might make, which can assist students when making similar decisions.
Homework Handout #1 will assist innovate/reinforce the fact that management of Molex is responsible for the financial statements and that Molex management will country in writing for the auditors that the financials are free of textile misstatements (Objectives 1 and ii). The assignment will too illustrate the importance of "tone at the top" at Molex and how a poor control environment can atomic number 82 to poor accounting choices (Objective 3). The assignment will let students make up one's mind whether Deloitte is violating the rules for independence by asking the CFO and CEO to step down (Objective four). Finally, by learning about the accounting choices of Molex and the responses of Deloitte, Homework Handout #1 will help auditing students go amend audit decision makers (Objective v).
Implementation Guidance for Homework Handout #1
Introducing and Assigning Homework Handout #ane
Instructors volition choose where this assignment best fits in their courses and how to form the assignment. The author assigns Homework Handout #ii at the terminate of the fifth week of the semester and gives the students i week to complete the assignment. 2 To avert answering repeat questions exterior of class, instructors should have a few minutes to talk over with the students what they are required to do.
When the author makes the consignment, students will have read well-nigh and discussed the AICPA Code of Professional Conduct (AICPA 2015). iii Students may inquire whether Deloitte's request to have the CEO and CFO stride down is a violation of the Code of Professional Bear because the auditors are making a request that appears to be similar to a managerial conclusion. As part of the assignment, the students need to decide whether the auditors violated the Code of Professional person Acquit. The students will exercise this by responding to Requirements 2 and iii.
Grading Homework Handout #ane
Students are awarded i percent of their overall course class for successfully completing the assignment. Based on the students' operation on the assignment, this is an adequate incentive. In the open-ended section of the pupil cess survey, none of the introductory audit graduate students (out of 31 respondents) and one undergraduate student (out of 46 respondents) stated that they would like the assignment to be worth more than points for the fourth dimension they spent. The students are awarded points for completing the consignment, not on the definiteness of the responses. Instructors may cull to increment the total points awarded and/or besides grade the students' writing. In the open up-concluded section of student cess survey, 1 graduate student wrote: "I like that my difference of stance regarding the actions of the auditors did not bear upon my overall form."
Classroom Implementation Issues for Homework Handout #1
As the author has assigned this assignment in the past, some students would not make a conclusion on Requirement 2: Practice you agree or disagree with the auditor's request? These students would gave the author 2 paragraphs, 1 to support agreement and the other to support disagreement. The author informed the students that they need to make a decision and so defend information technology in Requirement 3 ("Requite me a paragraph on what leads you to your determination in #two"). Students are instructed that if they do not make a decision, then they will lose points. Students practise not lose points if they make a determination that is not consequent with the teacher's opinion, simply instead lose points if they do not form and support an opinion of their own. Also, some students may question why they are looking at a case that is and so dated (i.e., over a decade has passed). The author has searched and has not been able to detect a like situation since the management of Molex filed their 8-Ks with the SEC. Instructors may desire to discuss this with their students and ask: Why do you think there has not been a similar state of affairs since the Molex example?
Evidence of Effectiveness for Homework Handout #1
The author used this assignment most recently during the Autumn 2016 semester at a large public university in a three-credit undergraduate introductory audit course. The undergraduate students completed a 12-item survey after completing Homework Handout #ane. 4 The writer too used the assignment at a large public university in a graduate introductory audit course, prior to arriving at the current academy. The graduate students completed an eight-item survey that matched the first viii statements from the undergraduate survey. The students were asked to respond on a five-point calibration (ane = strongly disagree, 5 = strongly concord). Tabular array 1 contains the responses from 46 undergraduate and 31 graduate students. The median response for all 12 statements was either 4, four.v, or 5. Students agreed that the consignment was a valuable learning experience (Statement 1, Hateful = 4.45, Median = five) and that the consignment was relevant to the inspect course (Argument 5, Hateful = 4.49, Median = five). In accordance with Learning Objective 5, students agreed that Homework Handout #1 was constructive for illustrating mistakes that auditors might make, which can help students avoid making similar mistakes (Statement 8, Mean = 4.45, Median = 5). One of the overall objectives of the assignment is to help students bridge the knowledge they proceeds in class to the auditing profession. Students agreed that Homework Handout #1 achieved this objective (Statement 2, Mean = four.45, Median = 5). The undergraduate students agreed that Homework Handout #1 helped them meet the remaining learning objectives (Statements ix–12, Means = 4.xxx–iv.48, Medians = four or iv.5).
Table 1
Homework Handout #1 Assessment Survey Responses
Possible Homework Handout #i Expansion
If instructors would like students to spend more time on discovering the audit profession, and then an expanded assignment is suggested below. On November 17th and 18th of 2004, the Standing Informational Group (SAG) of the PCAOB met for their annual meeting to talk over the Boards' Standard-Setting Agenda for 2005. Instructors may choose to expand the assignment past either having their students listen to the SAG Meeting excerpts or by having their students read the excerpt transcripts listed below in the expanded assignment and so requiring them to answer more questions after having the students mind to or read the excerpts. Instructors may too have the students read about the April 26, 2004 administrative proceedings against Ernst & Young equally described in Footnote 9.
Homework Handout #1 Expansion
On Nov 17th and 18th of 2004, the Standing Advisory Grouping (SAG) of the PCAOB met for their annual coming together to hash out the Boards' Standard-Setting Agenda for 2005. Following the discussion of agenda items on November 17th, the PCAOB Chief Auditor and Chairman of the SAG, Doug Carmichael, opened up time at the end of the second session for a word on emerging issues that the SAG members felt were of import, just had non been included in the agenda. Don Chapin, who was a fellow member of the SAG at the time, started a discussion on Molex: 5
In 1 of the contempo news articles there was an announcement of an auditing firm represented here who basically withdrew from customer service because they wouldn't fire the President and the Main Financial Officer; and that's probably going to happen with some—hopefully it's going to happen for some reasons like that in the future because of the way nosotros're approaching the audits now and the emerging issue is: How practice we finish people from just picking upwards that client and assuming that all is well? Because you can argue that people ought to go service, but you could also argue that the reasons for an auditing firm withdrawing from an engagement ought to be recognized and reinforced by the members of the profession. So unless that firm does fire its President and Chief Financial Officeholder, or unless they can persuade people that they have somehow reformed, that business firm should not get, that visitor should not get, service from an auditing business firm and I'm afraid that they will.
Doug Carmichael followed upwards Don Chapin's comments with the following: 6
That is something that I retrieve we'll exist paying attention to in the inspection procedure, information technology's an opportunity to practise that.
Charles Niemeier, PCAOB Board Member from 2002–2011 and present at the meeting, followed up on the comments by Don Chapin by stating: 7
Aye, just a follow-upwardly on Don your comment, and so Doug'southward response. One thing that makes the PCAOB unique among standard setters is our ability to inspect, and the issue that y'all raised, Don, is certainly a disquisitional ane. If an issuer tin can simply fire their auditor when faced with making a tough accounting decision, this system is not going to work and also oftentimes that has happened in the past. And then equally part of inspections, nosotros have started focusing from the very outset on client acceptance and customer retentiveness; and peer review organisation worked to a sure extent, it worked well, but it did not await at—principally because information technology was outside its scope—issues that would be more related to the business context of doing the inspect. So I am not saying it is not a standard-setting issue, merely I hope yous sympathize, that it's as well something that is being addressed by the board.
Lynn Turner, former Chief Accountant of the SEC and member of the SAG during this coming together, as well commented on Molex. viii He stated the following:
Offset of all, in the annotate that Charlie just made with respect to the one company that had the termination of auditors, I think anybody knows information technology is Molex. But I would echo what Don Chapin said, we accept tracked and seen a number of cases, and past the end of the twelvemonth nosotros will write a report about it, where i firm seemingly has done absolutely the right thing and resigned and walked away and conspicuously indicated that there was a lack of trust, and yet someone else runs in and picks it upwardly without whatsoever prior groundwork with the visitor—and picks it upward equally an accountant with no modify in the central management people. People down below may get changed, but people in the key positions don't get changed. And I just don't understand how a firm comes in and does that and traditionally, iii years afterward, four years after they're getting inverse out over again equally well, and I just recall the, especially in this particular case, information technology would astound me that afterwards what happened [that] another house would come in and take it up without seeing those type of changes made.
Ernst & Immature took over as external auditor subsequently Deloitte resigned at Molex. The SEC constitute that Ernst & Young had violated independence guidelines in their inspect of PeopleSoft and suspended Ernst & Young from accepting new Commission registrant inspect clients for a period of vi months starting April 26, 2004. 9 The suspension would have concluded around Oct 26, 2004 and therefore Molex would accept been 1 of the first new clients Ernst & Young added following their suspension.
Expanded Homework Handout #1 Requirements
- (1)
How can an inspect firm agree to audit a customer that was effectively "discarded" by another business firm?
- (2)
How are customer credence decisions made?
- (3)
How important is the public perception of an accountant'south choice nearly calculation or dropping clients?
- (4)
What issue might the SAG and outspoken critics of the profession have on firms?
Homework Handout #2: Ethical Dilemmas and the Lawmaking of Professional Bear
Learning Objectives
The objectives of Homework Handout #two include:
- (1)
introducing students to disciplinary actions taken past the PCAOB;
- (2)
having students evaluate and walk through the procedure of making a decision when faced with an ethical dilemma;
- (3)
having students find disciplinary proceedings that are taken by a land lath of accountancy for failure to follow the AICPA Code of Professional Conduct; and
- (4)
illustrating mistakes that auditors might brand, which can assist students avoid making similar mistakes.
Homework Handout #2 provides students with an overview of the disciplinary action taken by the PCAOB against Ann Marie Fitzpatrick (Audit Manager) and/or Stephen J. Nardi (Audit Partner) and learn the reasons why the activeness was taken (Objective 1). The assignment will also let students to identify and evaluate an ethical dilemma faced by Ann Marie and/or Stephen J., who were employees in the Philadelphia Function of BDO Seidman (Objective ii). Students will identify the sanctions taken against Ann Marie and/or Stephen J. for their actions. Identifying the sanctions will help students understand the potential consequences for non following the Lawmaking of Professional Comport (Objective three). Finally, by learning most the choices of two practicing auditors when faced with an upstanding dilemma, Homework Handout #2 should help auditing students become meliorate inspect decision makers (Objective four). There are multiple disciplinary proceedings from the PCAOB that bargain with audit documentation manipulation, post-obit the issuance of an audit report. 10 This disciplinary proceeding continues to be timely and the example was specifically called because of the unique feature that Ann Marie Fitzpatrick was faced with an ethical dilemma when she had just returned from holiday.
Implementation Guidance for Homework Handout #ii
Introducing and Assigning Homework Handout #2
The author assigns Homework Handout #2 at the end of eighth calendar week of a fifteen-calendar week semester and gives the students 1 week to complete the assignment. 11 To avoid answering repeat questions outside of class, instructors should take a few minutes to discuss with the students what they are required to practice. The writer gives this consignment subsequently the students have had an opportunity to learn well-nigh and discuss professional person ethics and inspect show. The lecture on audit testify covers inspect documentation. Alternatively, this consignment tin can be given toward the end of the semester when instructors are discussing the completion of the inspect. This gives instructors an opportunity to have a give-and-take on final review of the audit documentation.
Requirements 1 through 4 of the assignment are based on the framework for resolving ethical dilemmas described in Arens, Elderberry, Beasley, and Hogan (2016, 81–83). Instructors may cull to alter Requirements one through 4 to match the framework for resolving ethical dilemmas from their current textbook or from an ideals form at their college or university. The reading for the case comes from the "Enforcement" section, "Settled Disciplinary Orders" subsection of the PCAOB website (http://pcaobus.org/Pages/default.aspx). The PCAOB states in the Settled Disciplinary Orders subsection: "Listed beneath are all of the Lath orders in settlements that the Lath has reached with registered firms or their associated persons."
Grading Homework Handout #2
As with the showtime Homework Handout, students are awarded 1 percent of their overall grade course for successfully completing the assignment. Based on the students' functioning on the assignment, this is an acceptable incentive. In the open-ended section of the pupil cess survey, none of the introductory audit graduate students (out of 39 respondents) and one undergraduate educatee (out of 46 respondents) stated that they would similar the assignment to exist worth more points for the time they spent. Consistent with the other homework handouts, the students are awarded points for completing the assignment.
Classroom Implementation Issues for Homework Handout #ii
The upstanding dilemma presented in Homework Handout #ii focuses on a subordinate (Ann Marie Fitzpatrick) and her interactions with her supervisor (Stephen J. Nardi). Instructors can vary the assignment and have it focus on the supervisor (Stephen J. Nardi) and how he was faced with an upstanding dilemma. The expanded assignment also focuses on Stephen J. Nardi. Instructors may besides choose to split the form and take half of the class focus on the subordinate (Ann Marie) and her upstanding dilemma, and the other half of the course focus on the ethical dilemma faced by the supervisor (Stephen). In the past, the author has noticed that some students have said they were not able to find disciplinary actions against Ann Marie or Stephen J. when trying to consummate Requirement five. When introducing the assignment in course, the author has announced that there are disciplinary actions and that the students will have to search for them. This has helped to alleviate this issue.
Testify of Effectiveness for Homework Handout #2
Students in i section of a three-credit, undergraduate (graduate), introductory audit course completed an eleven-item (eight-item) survey after completing Homework Handout #ii. 12 The students were asked to answer on a v-point calibration (i = strongly disagree, five = strongly agree). Table 2 contains the responses from 46 (39) undergraduate (graduate) students. The median response for the 11 statements was either 4 or 5. Students agreed that the assignment was a valuable learning feel (Statement one, Mean = iv.45, Median = 4) and that the assignment was relevant to the audit course (Statement v, Mean = 4.47, Median = 4). In accordance with Learning Objective 4, students agreed that Homework Handout #2 was effective for illustrating mistakes that auditors might make, which can aid students avoid making similar mistakes (Statement eight, Mean = iv.57, Median = five). Ane of the overall objectives of the consignment is to help students bridge the noesis they proceeds in class to the auditing profession. Students agreed that Homework Handout #2 achieved this objective (Statement 2, Mean = 4.44, Median = 4). The undergraduate students agreed that Homework Handout #2 helped them meet the remaining learning objectives (Statements ix–11, Means = 4.35–iv.59, Medians = 4 or v).
TABLE 2
Homework Handout #ii Assessment Survey Responses
Possible Homework Handout #2 Expansion
Stephen J. Nardi was the engagement partner described in the PCAOB Disciplinary Lodge of Ann Marie Fitzpatrick. A PCAOB Disciplinary Order was issued for Stephen J. Nardi on the same 24-hour interval as Ann Marie Fitzpatrick (December 14, 2007) and can exist constitute on the PCAOB website (http://pcaobus.org/Enforcement/Decisions/Documents/12-14_Nardi.pdf). To enhance the assignment, instructors may focus the consignment on Stephen J. Nardi and add some additional questions for boosted discovery.
Homework Handout #2 Expansion
Expanded Homework Handout #2 Requirements
- (i)
How would you feel about Mr. Nardi's actions if y'all were a fellow partner with him at BDO Seidman? How could Mr. Nardi'south actions expose you to legal liability if yous were a fellow partner?
- (2)
What is the process the PCAOB follows for disciplinary proceedings?
- (3)
What additional punishments were taken against Mr. Nardi exterior of the deportment of the PCAOB due to the decisions Mr. Nardi fabricated in regard to the Hemispherx inspect?
- (4)
Exercise you feel the punishment and the length of the penalization Mr. Nardi received was advisable for the violation?
- (5)
Compare the punishments that were given to Ann Marie Fitzpatrick and Stephen J. Nardi. Are the differences in punishments advisable?
Homework Handout #iii: PCAOB Inspection Reports
Learning Objectives
The objectives of Homework Handout #3 include:
- (1)
introducing students to PCAOB inspection reports;
- (two)
having students compare the cognition gained through an introductory audit course to the deficiencies described by the PCAOB inspection reports of Big four audit firms; and
- (iii)
having students place audit deficiencies they can avoid when they become practicing auditors.
Through completing Homework Handout #iii, students accept an opportunity to read through the most electric current inspection reports for the Big 4 audit firms (Objective 1). Each student is assigned 2 of the Big 4 audit firms and evaluates audit deficiencies that are identified during the firms' PCAOB inspections. Students utilize the audit procedures they take gained from the audit form to decide which is the worst deficiency listed for an individual firm and which of the two firms they examine has the overall worst deficiency (Objective two). This evaluation can help introductory audit students realize that the inspect procedures they have learned in class are important and will be used in their careers. Also, identifying the deficiencies will hopefully assist students to avert the same deficiencies in their audit careers (Objective 3). The Big 4 firms are the focus of this assignment and this is not meant to bias students against these firms. If instructors are worried nigh this potential bias, then they can add the next 4 largest firms (due east.g., RSM US, Grant Thornton LLP, BDO United states, LLP, and Crowe Horwath LLP) to the consignment to let students to be more objective.
Implementation Guidance
Introducing and Assigning Homework Handout #3
The writer assigns Homework Handout #3 every bit close to the end of the semester as possible and gives the students one calendar week to complete the assignment. To avoid answering repeat questions outside of form, instructors should take a few minutes to discuss with the students what they are required to exercise. The PCAOB describes the inspection process as follows on their website (https://pcaobus.org/Inspections/Pages/InspectedFirms.aspx and https://pcaobus.org/inspections/Pages/default.aspx):
PCAOB inspects registered public accounting firms to assess compliance with the Sarbanes-Oxley Act, the rules of the Board, the rules of the Securities and Substitution Commission, and professional person standards, in connection with the house's performance of audits, issuance of audit reports, and related matters involving U.S. companies, other issuers, brokers, and dealers.
More than than two,000 public bookkeeping firms, including U.S. firms and non-U.Southward. firms, are registered with the PCAOB. The PCAOB conducts regular, periodic inspections of hundreds of those firms, but non all of those firms. Information technology should not exist assumed or expected that a firm registered with the PCAOB is, or necessarily will be, inspected by the PCAOB.
The Sarbanes-Oxley Act authorizes the PCAOB to inspect registered firms for the purpose of assessing compliance with certain laws, rules, and professional person standards in connection with a firm'southward audit work for clients that are "issuers," as that term is defined in the Act,* and (following amendments to the Act in 2010) a business firm's audit work for clients that are securities brokers or dealers. Many PCAOB-registered firms perform no such work, and the work they do perform is not within the scope of the PCAOB's statutory responsibility and authority to assess. The PCAOB does not audit those firms.
In that location are a variety of reasons that firms that perform no inspect piece of work for issuers, brokers, or dealers might register with the PCAOB. Some regulators have adopted rules requiring persons subject to their jurisdiction to employ PCAOB-registered firms for specified services unrelated to audits of issuers, brokers, or dealers. In addition, firms that currently do no audit work for issuers, brokers, or dealers might register with the PCAOB just to exist in a better position to compete for future business for which registration is required.
The PCAOB regularly inspects those firms that outcome audit reports opining on the financial statements of issuers. The actual number of firms that the PCAOB regularly inspects fluctuates since sure registered firms finish to issue audit opinions while other firms will begin to issue audit reports for the first fourth dimension. In general, the PCAOB inspects each firm in this category either annually or triennially, depending upon whether the firm provides audit reports for more than than 100 issuers (annual inspection) or 100 or fewer issuers (triennial inspection). At any time, the PCAOB might also inspect any other registered firm that plays a role in the audit of an issuer, and the PCAOB has a practise of inspecting, in each year, some firms in that category. The PCAOB began conducting inspections of registered firms' audits of brokers and dealers in 2011.
The writer mentions inspection reports early in the semester when discussing the CPA profession quality control and accounting firm peer reviews. The author reviews the PCAOB's description of the inspection process with students before assigning Homework Handout #iii. If instructors accept not shared this information with their students, then they tin utilise the above description as an appropriate introduction.
Grading Homework Handout #3
As with Homework Handouts #1 and #2, students are awarded ane per centum of their overall form grade for successfully completing the assignment. Based on the students' operation on the assignment, this is an adequate incentive. In the open-concluded section of the student assessment survey, only one graduate pupil (out of 37 respondents) and one undergraduate student (out of 43 respondents) stated that they would like the assignment to be worth more points. The students are awarded points for completing the consignment, not on the correctness of the responses. Talking points are provided for instructors in the Educational activity Notes. Suggested solutions are not provided in the Teaching Notes as this consignment volition change each year when the new PCAOB inspection reports are issued. Instructors volition demand to read through the inspection reports to prepare for in-class word. Instructors should decide which deficiencies they feel are the worst prior to class, and can decide if they want to bring this into the discussion.
Classroom Implementation Bug for Homework Handout #3
The major implementation upshot for instructors with this consignment is to decide when to give the assignment. Assigning Homework Handout #three to students late in the semester allows students to maximize their auditing knowledge. 1 of the bug with assigning Homework Handout #3 toward the end of the semester is that students accept many cease-of-the-semester assignments and projects and this may add undue stress. In past semesters, during which the author did not give assessment surveys along with Homework Handout #3, students would let the author know in office hours or through course evaluations that they were displeased to accept the consignment at the busiest part of the semester. In the past, the writer gave the assignment earlier in the semester to convalesce the workload toward the end of the semester. In the open up-ended section of the student assessment survey given during that semester, three introductory audit graduate students (out of 37 respondents) and one undergraduate student (out of 16 respondents) stated that they would like the consignment to be given later in the semester to maximize their audit cognition available to complete the assignment.
The students are split by their last name and roughly half the class is assigned to look at the inspection reports of Deloitte and PwC, and the remainder is assigned to Ernst & Young and KPMG. If instructors cull to stay with this format, then they will demand to arrange the alphabetical groups to brand sure each grouping contains roughly one-half the class. Equally the author has given the example over multiple years, there have been classes in which the students were hesitant to share what they idea were the worst deficiencies. For these cases, the author would randomly phone call on students from the different groups and ask them to share what they had written for their completion of the assignment requirements.
Bear witness of Effectiveness for Homework Handout #3
Students in one section of a three-credit undergraduate (graduate) introductory inspect class completed an 11-item (eight-item) survey after completing Homework Handout #3. 13 The students were asked to reply on a five-bespeak scale (1 = strongly disagree, 5 = strongly hold). Table three contains the responses from 43 (37) undergraduate (graduate) students. The median response for each statement was either 4 or 5. Students agreed that the assignment was a valuable learning feel (Statement ane, Hateful = 4.18, Median = 4) and that the assignment was relevant to the audit form (Statement 5, Hateful = 4.23, Median = iv). In accordance with Learning Objective 3, students agreed that Homework Handout #3 was effective for illustrating mistakes that auditors might make, which can help students avoid making similar mistakes (Statement viii, Mean = iv.38, Median = v; Statement 11, Mean = 4.37, Median = 4). 1 of the overall objectives of the consignment is to help students bridge the knowledge they gain in class to the auditing profession. Students agreed that Homework Handout #3 achieved this objective (Statement ii, Mean = four.30, Median = iv). The undergraduate students agreed that Homework Handout #3 helped them run across the remaining learning objectives (Statements 9 and x, Means = iv.47 and 4.37, Medians = v and 4, respectively).
TABLE 3
Homework Handout #three Assessment Survey Responses
Possible Homework Handout #three Expansion
To add some additional discovery about the PCAOB inspection procedure, instructors may cull to have their students read the PCAOB'southward caption of how inspections are conducted and reported upon. The rules for inspection can be establish at the PCAOB website (https://pcaobus.org//Rules/Pages/Section_4.aspx). The rules talk about general guidelines, including the frequency of inspections and how to handle violations. The rules exercise not talk over how samples are selected. In a May 21, 2008 address to the Association of Audit Committee Members, Mark W. Olson, former chairman of the PCAOB outlined the evolution of PCAOB inspections. xiv In his speech, Chairman Olson talks near how the PCAOB selects a firm's inspect clients to exist inspected. Assigning these two readings to students will help students to understand the nature of inspections (due east.g., not-random, risk-based selection criteria; timeliness issues; response process by firms) and it will help them interpret inspection reports in that broader context. These suggestions can be institute in the Homework Handout #3 Expansion below.
To get a more complete view of the Large 4 business firm performance, it would be helpful to examine the firms' operation year later yr. This suggests a possible follow-up assignment, which is not found in the suggested expansion beneath. Instructors may choose to ask students to wait at the Big four accounting firms' performance over time. Students could place whether the total number of deficiencies for a specific firm decreases year after twelvemonth. Students could also identify whether there are similar deficiencies being identified in the inspection reports yr later on year, or whether they are different. This type of analysis past the students provides a meliorate judgment of how the Big four accounting firms are doing in their audits.
Another follow-up assignment is to look at the PCAOB inspection reports for a smaller, local firm in the surface area of the instructor's college or university. Again, this is non found in the suggested expansion below. Every bit the author has washed this with students, he has picked a local house with i or two public company audit clients. The students' and author's expectations were that the local firms would work hard to ensure that they had no deficiencies. This was the case for the firms we examined. This can atomic number 82 to a word on what affect a deficiency might have on an bookkeeping business firm that only audits a small number of public companies.
Homework Handout #3 Expansion
Expanded Homework Handout #3 Requirements
- (1)
How are an audit firm'south clients selected past the PCAOB for the inspection process?
- (two)
What features of the audit house and areas of the audit practice the PCAOB focus on in their inspections?
- (three)
What reporting process does the PCAOB follow subsequently their inspections and what is the response process of the audit firms being inspected?
- (4)
How might you expect this inspection and reporting procedure to "improve" the audit process?
REFERENCES
American Institute of Certified Public Accountants (AICPA)
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AICPA Professional Standards
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Lawson R. A E. J Blocher P. C Brewer G Cokins J. E Sorensen D. East Stout G. L Sundem South. M Wolcott M. J. F Wouters
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Auditor resigns after Molex refuses to dismiss officers. (November 16)
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Public Visitor Accounting Oversight Board (PCAOB)
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2012
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Maintaining and Applying Professional Skepticism in Audits
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Staff Audit Exercise Alert No. x
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Securities and Exchange Commission (SEC)
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Turner L. E J. P Williams T. R Weirich
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An inside expect at auditor changes. The CPA Journal (Supplement): 12–21
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Wright M. C
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Getting more out of less: The benefits of short-term experiential learning in undergraduate sociology courses
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2
Students will accept had classes on the CPA profession, Audit Report, Professional Ethics, Legal Liability, Auditor Responsibilities, Audit Evidence, Inspect Planning, and Materiality at this indicate in the course.
vi
The webcast tin be constitute at the web address from footnote 5 and the discussion by Doug Carmichael can be found by clicking on Twenty-four hours 1, Session 2 webcast and moving to the i:35:12 time. The transcribed section from Doug Carmichael ends at 1:35:20.
7
The webcast can exist found at the web accost from footnote 5 and the discussion by Charles Niemeier can be institute by clicking on Solar day 1, Session two webcast and moving to the one:37:50 time. The transcribed section from Charles Niemeier ends at 1:38:55.
eight
The webcast can be found at the web address from footnote 5 and the give-and-take by Lynn Turner can be found by clicking on Day 1, Session 2 webcast and moving to the 1:39:08 time. The transcribed section from Lynn Turner ends at 1:twoscore:xviii.
11
Students volition have had classes on the CPA profession, Inspect Report, Professional person Ethics, Legal Liability, Auditor Responsibilities, Audit Evidence, Audit Planning, Materiality and Chance, Internal Controls and Control Chance, and the Overall Inspect Program and Audit Program at this point in the class.
12
The author used this consignment nigh recently during the Fall 2016 semester at a big public university in a 3-credit undergraduate introductory audit form. The author also used the assignment at a large public university in a graduate introductory audit class, prior to arriving at the current university. The graduate students completed an eight-particular survey that matched the first viii statements from the undergraduate survey.
13
The writer used this consignment nearly recently during the Fall 2016 semester at a big public university in a three-credit undergraduate introductory audit course. The author too used the assignment at a large public university in a graduate introductory audit grade, prior to arriving at the electric current university. The graduate students completed an eight-item survey that matched the first eight statements from the undergraduate survey.
CONCLUSION
This case contains three Homework Handouts that can be used to help students to span the knowledge they are gaining in class to bodily events from the auditing profession. The assignments are constructed to give students a cursory experiential learning feel to supplement the material they learn in class. Each assignment requires a one-page or less, typed response to exist turned in for grading. Simply prior to students turning in the written assignment, instructors lead an in-class discussion that focuses on the Homework Handout. The assignments cover auditor independence (auditors' role to avoid managerial decisions), management representation letters, ethical dilemmas faced past auditors, sanctions against CPAs for violating the Code of Professional person Behave, and PCAOB inspection reports. Each Homework Handout contains suggestions for expanding the consignment to help instructors easily arrange the assignments to fit his or her needs.
In their assessments, students agreed that completing the Homework Handouts was a valuable learning experience and effective as a means of tying what they had been learning in grade to actual events in the accounting/auditing profession. Students found the Homework Handouts to be interesting, relevant to the audit course, and recommended that the Homework Handouts exist used in future audit courses. Finally, students agreed that the Homework Handouts were effective for helping them avoid mistakes in the future.
TEACHING NOTES AND STUDENT VERSION OF THE CASE
Education Notes and the Student Version of the Case are available only to not-pupil-fellow member subscribers to Electric current Issues in Auditing through the American Accounting Association's electronic publications system at http://world wide web.aaapubs.org/. Non-educatee-member subscribers should apply their usernames and passwords for entry into the system where the Didactics Notes tin can be reviewed and printed. The "Student Version of the Example" is available as a supplemental file that is posted with the Didactics Notes. Delight do not make the Teaching Notes available to students or mail service them on websites.
If you are a non-student-fellow member of AAA with a subscription to Current Issues in Auditing and have any trouble accessing this material, please contact the AAA headquarters office at info@aaahq.org or (941) 921-7747.
REFERENCES
American Institute of Certified Public Accountants (AICPA)
.
2015
.
AICPA Professional Standards
.
New York, NY
:
AICPA
.
Arens A R. J Elder 1000 Beasley C. E Hogan
2016
.
Auditing and Assurance Services: An Integrated Approach
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Brucker W. Thou J. E Rebele
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Fraud at a public authority
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Clikeman P. M J Diaz
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Stefaniak C. K
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Using "the moving ridge" to facilitate participants' understanding of the implicit pressures associated with the auditing profession
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Current Problems in Auditing
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APPENDIX A
How to Make Auditing Textbook More Fun to Read
Source: https://meridian.allenpress.com/cia/article/11/2/I1/67315/Introductory-Audit-Homework-Handouts-A-Bridge-from
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