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1. (1) SAS 99 states the professional skepticism as an attitude thatincludes a questioning mind and critical assessment of auditevidence. The auditor should conduct the entire engagement with anattitude of professional skepticism, consider audit evidencesseriously, and finally, the auditor should continuously questionwhether information and evidence obtained suggest that materialmisstatement caused by fraud has occurred. (SAS 99)

(2) Will found out that one cash payments wasnt deposited into thatdays bank account and kept digging even the amount is only $320,which is within the range of materiality. Also he had a questioning

mind of the explanation Jess provided so that he noticed thedifference of the ink color on envelop and receipt book, which wassupposed be written at the same time. Then he looked closely at thedate printed on the $100 bill, which was surprisingly one year laterthan the receipt date. Moreover, Will reported all the evidence hegathered to the partner and discuss it with him, which also indicateshis professional skepticism.

(3) Will could have accepted Jesss explanation because of thefollowing reasons. Firstly, the $320 is very small amount compared to

$5000 the materiality amount. Secondly, Will has been engaged inthe audit for over 3 years, which he wouldnt have doubted that onecash payment missing indicated a theft of cash. Thirdly, Jess is hisgood friend for years and he might have unconscious bias to believewhat she said because of the familiarity with her.

2. (1) The second standard of the General Standards of the USGASS require independence as The auditor must maintainindependence (in fact and appearance) in mental attitude in all

matters related to the audit.(2) Independence in appearance is the result of others' interpretationsof this independence, which does not have a specific standard toevaluate. The auditor may not able to maintain an unbiased attitudethroughout the audit, but he or she can still maintain independencewith cautious considerations. Independence in appearance is


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mentioned in Rule 101 of the Code of Professional Conduct. Auditorstry to achieve independence in appearance by following theaccounting rules of SEC, AICPA and other regulatory bodies. Alsoauditors should maintain his or her professional ethics.

(3) The Code of Professional Conduct mentioned the clientrelationship in Rule 101. It mentioned that the certificates should notdevelop any relationship with any client which is object toprofessional objective. The Code of Professional Conduct addressesthe issue of personal client relationships to provide the auditor aspecific standard of independence. The personal relationship wouldimpair independence by virtue of appearance. For example, as wediscussed in the class, the familiarity would affect the mental attitudeof objectivity of the auditor. Also, as in the case, the personal client

relationship would increase the pressures of the auditor. Thus,including the personal client relationship in the Code of ProfessionalConduct is essential.

(4) SAS No. 1, section 220 stated that In all matters relating to theassignment, independence in mental attitude is to be maintained bythe auditor or auditors. The difference between independence inappearance and in mental attitude is that independence in attitudecant be measured and should be determined in auditors mind.Theres no rule to regulate auditors independence in his or her mind

and auditors should to be free of bias even they already achievedindependence in appearance.

(5) Wills independence in appearance was kind of impaired by hisfriendship with the clerk of the client. And he shouldnt have decidedto go hunting with Nacho and Jessie during the engagement. But Willdid have independence in attitude, resulting in his suspicious aboutJesss theft of company assets.

As we have discussed in the class, we think selfless objectivity playsgreatest role in determining auditor independence. An auditor shouldmaintain objectivity and be free of conflicts of interest in dischargingprofessional responsibilities. Selfless objectivity reflects both themental attitude of values, beliefs and interests of the auditors when


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providing auditing. In a word, selfless objectivity is a key factor indetermining independence.

(7) The profession should emphasize accounting rules and principlesto promote independence. The governmental bodies should issueimplements and new accounting standards for the independent rulesand principles. The rules and principles provide not only guidance butalso constraints to the auditors behavior. Also, the firms couldprovide lectures about professional ethics, and test the staffsregularly.

3. Evidence supporting Jesss position

Jess often worked late and at the end of the day, she checked the

receipt book and prepared deposit slip and deposit

Type: Inquiry of the client

There werent many tickets paid in cash. It seems normal that onedeposit fell between two cabinets.

Type: Analytical analyze

Jess was the Work Jess who everyone counted on.

Type: Inquiry if the client

Jess seemed to be unsurprised by the query of missing cash receipt.

Type: Observation

Evidence refuting Jesss claim

The envelop ink color was different from the ink color of entry in thereceipt book.

Type: Observation of the records and documents

The date printed on $100 bill was one year after the cash receiptdate.

Type: Observation of the records and documents


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Jess handled all the work alone: receipt of the cash, update thereceipt book and deposit. There was a chance that Jess steal themoney without being found by others

Type: Inquiry of the client

4. Segregation of duties could have prevented this theft. There shouldbe different staffs to record the transaction, handle the assets andreconcile. When the ticket is paid in cash, one staff should producethe receipt and forward it to another staff to deposit. At the end ofday, the receipt from the bank should be reconciled with the cashreceipt by a third person. With this routine, the risk of theft would bedecreased.

5. First, Vince and Will should decide how the fraud will affect thewhole audit engagement. They should reevaluate the integrity of theclient staff and the effectiveness of the internal control of the clientcompany. It seems the segregation of duties hasnt been conductedin the cash receipt in the revenue process. They probably shouldconduct more substantive tests to obtain additional evidence in thisarea and interview other personnel who also handle the cash.

Then they should inform the management about the possible fraudand discuss to extend the time limit of audit. If the management

prevents them from extending the deadline, they should considerwithdraw from the engagement because of the scope limitation. If themanagement cooperates with the auditors, Vince and Will shouldupdated the audit plan and conduct more tests on other area exceptthe cash receipt as a result of high control risk. Also, they may hireone forensic accountant to help them identify the potential fraud.

They should determine whether misappropriate of assets materiallymisstates the financial statement and what opinion auditor shouldissue. They also should report the possible fraud influence to auditcommittee and board of directors. If more than one people are likelyto be involved in fraud, auditors should interview all of them to collectmore evidence.

Finally, Vince and Will should document the consideration of fraud.

6. Will found that his best friends wife conducts the fraud, and when


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appealing this issue, he faced lots of pressure from his friendship withthem. His professional responsibility is to report the fraud to thecompany management, which led to putting his friend in jail. Loss offamily friends, rumors and misunderstand of other people in town hassignificantly affected his life. In general, most auditors may face thesimilar pressure as Will. Managing the personal client relationship ismuch harder when the client staff is your friend. Such relationshipcould not only affect the auditors independence in appearance butalso in mental attitude. It is possible that auditors dont report ordetect the fraud findings because of unconscious or conscious bias.So we think, the best to do in Wills situation is that he should tell thepartner before the engagement that his best friend is the clerk of theclient and not involved in the engagement.

7. Alternative 1

Will wont report his findings to his company forthe following reasons.First, DB&H had been doing the audit for the last four years and hadnever had any problems. As we know, Will just took this job for onlyfour months and it is his first engagement on his own at DB&H. Willmay suspicious himself because of his lack of work experience thushe may keep silence since nobody found the issues before. Also,Jessica is his best friends wife and they have known each other formany years, thus Will may try to believe that Jessica wont do any

fraud.

Possible consequence: DB&H may not find the $21,000 materialmisstatement in the financial statement and Will can keep his job.Even this fraud is found out later, Will may have no responsibility byinsisting that he conduct the required procedure by inquiry Jess aboutthe missing cash payment and find out nothing.

Alternative 2

Before reporting to the partner, Will may express his doubt to Jessand ask her why she replaced the missing $320 with her own money.Then he needs to decide whether to believe what she said. Jess willbe most likely to explain that she just wanted to save her job by doingso and beg Will not to tell the company and the firm for the sake oftheir lifelong family friendship. Under the pressure, Will may comprise


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and not report the fraud.

Auditors are required to report the suspected or detected fraud. Thefailure of reporting may lead to misconduct and revocation of CPAlicense. Also, if the fraud is found out later, Wills behavior will end hisprofessional career and also hurt firms reputation.

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