Workpapers/Documentation

06/03/2010

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Workpapers/Documentation
I tell my students that if they are ever called upon to defend one of their audits in court, the only evidence that will help them is the evidence documented in the workpapers. It helps if I can find one or two students who have completed internships to talk about how much time they spent writing, rewriting, and rewriting again detailed descriptions of the work they performed. Sadly, it is easy to find media accounts of auditors who have been caught altering and/or backdating audit workpapers.

Articles:
“Advancing the Audit Documentation Standard,” Ray Whittington, Lynford Graham, Gretchen Fischbach & John Ahern, Journal of Accountancy (June 2006): 64-69. This article explains SAS No. 103’s requirement that audit documentation should be sufficiently detailed to give experienced auditors who were not involved in the audit a clear understanding of the work performed, the evidence obtained, and the conclusions reached. 

Examples of Documentation Violations:
“PCAOB Disciplines Former E&Y Auditors,” Michael Cohn, AccountingToday.com (August 1, 2011). Three E&Y auditors were disciplined for altering and backdating audit workpapers in advance of a PCAOB inspection. 

“SEC Suspends 3 Ex-Managers of KPMG Over Tenet Audit,” New York Times (March 31, 2006): C6. Three audit managers are disciplined for altering and backdating audit workpapers.

“NextCard Auditor Admits to Tampering,” Wall Street Journal (November 1, 2004): C3. A former Ernst & Young partner pleads guilty to altering workpapers to cover up deficiencies in audit of NextCard.

“Denver Accounting Firm Faces SEC Fine,” D. Milstead, Rocky Mountain News (July 13, 2004): B3. Auditors are charged with destroying documents and altering workpapers after the SEC began an investigation of client Sport-Haley.

 
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Confirmations

06/03/2010

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Confirmations
Textbooks generally claim that confirmations are reliable evidence because they are provided by independent third parties. But I teach my students to be very careful about how they address the confirmation requests and interpret the responses. Stephen Taub’s CFO.com article and Cassel Bryan-Low’s Wall Street Journal article provide valuable illustrations of what can go wrong during the confirmation process. Even under ideal circumstances, Paul Caster’s field study found that less than half the misstatements contained in accounts receivable confirmation requests were reported to the auditors. His Journal of Accountancy article is easy for undergraduate students to read and understand.

Articles:
“Audit Confirmations,” Paul Clikeman, Internal Auditor (April 2012). This brief article describes the differences between positive, negative, blank, and expanded field confirmation requests, and describes procedures for improving confirmation response rates.

“PCAOB Mulls Revising Confirmation Standards,” WebCPA (April 14, 2009). The PCAOB issued a concept release in 2009 discussing electronic confirmations, disclaimers, and management requests not to confirm certain accounts.

“Better Evidence Gathering,” Donald McDonnell & Charles Schweiger, Journal of Accountancy (April 2008): 32-35. Guidance for improving confirmation response rates, when to use positive vs. negative requests, use of electronic confirmations, management requests not to confirm, and alternative procedures.

“Automating the Confirmation Process,” George Aldhizer & James Cashell, The CPA Journal (April 2006): 28-32. This article describes how an electronic confirmation infrastructure developed by Capital Confirmation Inc. helps auditors authenticate confirmation responders, reducing the risk of confirmation fraud.

Examples:
“SEC: How Ex-PwC Auditor Missed Fraud,” Stephen Taub, CFO.com (February 12, 2008). PwC received only one response to 15 confirmation requests. The SEC concluded that PwC’s alternate procedures were “inadequate.”

“Vendor Rebate Problems May Be Broader Than Thought,” Cassel Bryan-Low, Wall Street Journal (May 13, 2003): C1+C3. Vendors may have signed false confirmations regarding rebates due to U.S. Foodservice. Confirmation requests are often sent to sales reps who do not want to anger customers.

Relevant Research:
“A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness,” Paul Caster, Randal Elder & Diane Janvrin, Auditing: A Journal of Practice & Theory (November 2008): 253-279. Academic research finds that low response rates, respondent errors and directional bias are key barriers to confirmation effectiveness. AAERs identify failure to authenticate responses, collusion between client management and customers, and concealed side agreements as specific problems in auditing practice.

“An Empirical Study of Accounts Receivable Confirmations,” Paul Caster, Auditing: A Journal of Practice & Theory (Fall 1990): 75-91. The author seeded errors in accounts receivable confirmation requests. Only 47% of the misstatements were reported to the auditors. Customers were more likely to report overstatements than understatements.

“The Role of Confirmations as Audit Evidence,” Paul Caster, Journal of Accountancy (February 1992): 73-76. An easy-to-read summary of the previous research study. Written for practitioners and appropriate for undergraduate students.

"Improving the Results of Second Confirmation Procedures," R.G. File & B.H. Ward, Auditing: A Journal of Practice & Theory (Spring 1995): 87-93. The response rate is no different betwen confirmation requests printed on the auditor's letterhead and requests printed on the client's letterhead, but customers report fewer "false exceptions" if the requests are on the auditor's letterhead.
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Interviewing

06/03/2010

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Interviewing

Although auditors spend a large fraction of their time interviewing client employees, auditing textbooks are almost silent on the topic of effective interviewing. Staff auditors are sent to talk to warehouse managers and payroll supervisors with little guidance on how to pose good questions or analyze responses. The Seipp & Lindberg CPA Journal article is the best resource I've found for teaching students how to conduct an effective inteview.

Most articles and teaching materials related to interviewing focus on fraud investigations – a special type of interview. Last year, I started using the “Jones Company” case written by Coe et al. The accompanying DVD gives students a glimpse of what it is like to question a fraud suspect.

The Gold et al. Accounting Horizons article is a fun piece of research to discuss in class. Auditors, in a simulated negotiation, gave more credence to information provided by a male CFO than a female CFO. And the female auditors exhibited the most male favorability.

Articles:
“A Guide to Effective Audit Interviews,” Edward Seipp & Deborah Lindberg, CPA Journal (April 2012): 26-31. This article instructs auditors how to select who to interview, establish rapport, ask good questions, and assess interview results.

“The Ten Tell-Tale Signs of Deception,” Paul Clikeman, Fraud Magazine (Jan/Feb 2012): 30-35. This article describes the use of linguistic statement analysis to detect deception in written or oral statements.

“Common Question-Evasion Tactics,” Scott Emmett & David Wood, Journal of Accountancy (July 2010): 36-39. This article provides advice for conducting productive interviews even when the client tries to evade the auditor’s questions.

“Easing Into Interviews,” Paula Whatley, Internal Auditor (October 2005): 25-26. This very concise article provides advice for preparing for interviews, establishing rapport, obtaining buy-in, conducting the interview, effective listening, and wrapping up.

“Answer Please: Fraud-Based Interviewing,” John J. Hall, Journal of Accountancy (August 2005): 61-65. This article provides advice for planning and conducting an interview when fraud is suspected.

“Detecting Deception During Interviews,” John Waltman & Steven Golen, Internal Auditor (August 1993): 61-63. This article describes nonverbal behaviors that suggest deception.

Instructional Videos:
Finding the Truth: Effective Techniques for Interview and Communication. Association of Certified Fraud Examiners (2008). The 50-minute DVD contains tips for conducting interviews and detecting deception.

Beyond the Numbers: Professional Interviewing Techniques. Association of Certified Fraud Examiners (2008). The 50-minute DVD shows footage from an actual information-seeking interview and an actual admission-seeking interview.

Classroom Exercises:
“Something’s Fishy at Jones Company,” M.J. Coe, J. Coussens & J. Delaney, Fraud Magazine (May/June 2009): 24-26, 54-56. A teaching case involving employee embezzlement. The accompanying DVD (available for free from the authors) uses amateur actors to depict two interviews between the auditor and the guilty employee.

Relevant Research:
“The Effect of Audit Inquiries on the Ability to Detect Financial Misrepresentations,” C. Lee & R.B. Welker, Behavioral Research in Accounting (2007): 161-178. Undergraduate accounting students were unable to distinguish between videotaped subjects who were lying and those who were telling the truth. And watching an ACFE training videotape did not statistically improve the students’ detection accuracy.

“The Impact of Client and Auditor Gender on Auditors’ Judgments,” A. Gold, J.E. Hunton & M.I. Gomaa, Accounting Horizons (March 2009): 1-18. In a simulated negotiation with a client CFO, auditors were more influenced by information provided by a male CFO than a female CFO. Female auditors exhibited the most male favorability.
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