Reference no: EM131811301

Question -

A) Read the case study and evaluate what you would do next.

B) Given the knowledge gained from these case studies, what are the key elements to applying professional skepticism?

Case Study - You Just Don't Understand Journal Entries

I was a first-year senior assigned to the audit of a large client. I welcomed the challenge and the learning experiences I was sure would come with it.

Every year the engagement team deliberately varied the nature, timing, and extent of audit procedures, and this year the team planned to test an account balance that didn't vary much year to year and was seen as a low-risk.

However, as we began testing the account balance, we realized it would involve a lot more work than we expected. It seemed that there was a large volume of journal entries posted to the account representing allocations and expenses from nearly every location across the United States.

We needed to make requests of entity personnel at various locations to understand the nature and purpose of the journal entries that had been posted to the account. Of those personnel, relatively few had ever interacted directly with an external auditor.

Initially, entity personnel were more than willing to help, but no one person seemed to know the whole story. We were constantly being directed from one person to another, and each person could offer only partial explanations for the journal entries about which we were inquiring.

Soon it became routine for us to be on a call with eight or ten entity personnel from the various groups involved in the journal entries, trying to gain a full understanding of the purpose of the journal entries and underlying allocations and expenses.

As our work continued, the frustration of both parties increased, and we noticed a distinct change in the tenor of the calls.

Instead of focusing on answering our questions, the entity personnel believed that we were wasting their time; they became defensive.

"It's been done this way forever," "you're spending way too much time on insignificant items," and "you just don't understand the way we handle expenses," were some of the comments that fell on my inexperienced ears. To be honest, at times I felt uncomfortable, and sometimes it was a bit intimidating. But I knew we had a job to do.

As we neared the completion of our fieldwork, explanations and support for several of the journal entries remained open and unresolved, prompting some rather pointed internal questions from the partner in charge of the audit engagement.