AUDT317 - Auditing Case Study: Ethical Dilemma Report

This report presents a comprehensive case study analyzing ethical dilemmas in auditing, specifically within the context of Tower Ltd. It examines a scenario where senior audit managers, Larry and Joe, face a conflict of interest and ethical breaches related to potential financial statement fraud and misleading actions by the client. The report follows the American Accounting Association decision-making model to evaluate the facts, ethical issues, principles, alternatives, and consequences. It explores relevant auditing standards such as AU Section 317, AU Section 110, and AS 2401, highlighting the responsibilities and functions of the independent auditor. The analysis delves into the values and ethics of auditors, comparing alternatives and their potential outcomes, including the impact on the client's reputation and legal repercussions. The report concludes by recommending a course of action for Larry, emphasizing the importance of communication, ethical conduct, and potential legal actions to protect both Joe and the integrity of the audit process. The case study underscores the significance of ethical decision-making in maintaining trust and transparency within the auditing profession.

Running head: Auditing
Auditing
Name of the Student:
Name of the University:
Author Note:

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Executive Summary
Auditing is considered as important in the continuation of every company. This report consists of
a case study that is based on auditing values, principles and ethics. Two friends are in the same
position as senior audit managers and they are expecting a promotion. However, there is only
one position left for promotion. At this stage, one of the auditor’s past conflict comes into
existence in front of another auditor. How the other auditor will react and solve the issue is the
discussion of this report keeping in mind the legal actions that could be taken against the client.

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Table of Contents
1.1 Introduction................................................................................................................................3
1.2 Discussion..................................................................................................................................3
1.2.1 Determining the facts..........................................................................................................3
1.2.2 Ethical issues defined.........................................................................................................3
1.2.3 The major principles, rules and values which are related regarding the purpose of Tower
Ltd................................................................................................................................................3
1.2.4 The alternatives...................................................................................................................4
1.2.5 Comparing Values and Alternatives...................................................................................5
1.2.6 The consequences of the act by Larry................................................................................5
1.2.7 Final decision......................................................................................................................5
1.3 Conclusion.................................................................................................................................6

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1.1 Introduction
This report is based on the case study where Larry and Joe are senior Audit managers and
Larry is appointed as auditor by Tower Ltd and he founds that they had a personal conflict with
Joe before. Larry should solve the issues personally keeping in mind the consequences of not
informing legally to the managers. The discussion is based upon the fact of whether Larry should
resolve the issue or not.
1.2 Discussion
The discussion has been presented following the American Accounting Association
decision-making model
1.2.1 Determining the facts
Larry is a senior auditor who found that there were no issues made from Joe’s side.
Rather, he did an excellent job while auditing. The company (Tower Ltd) falsely put the
allegation over Joe so that severe punishment is taken against him. Larry suspected that there
might be some personality conflicts going on which mislead the audit manager of the client
company (ACCA Study Material 2020).
1.2.2 Ethical issues defined
Tower Ltd has violated the ethics by misleading the independent auditor as well as the
internal audit manager against another independent auditor (www.dictionary.com 2020). The reason
could be that the client company had to disclose a lot of their accounts, which involved
fraudulent form their side, which Joe had identified and taken into account.

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1.2.3 The significant principles, rules and values which are related regarding the
purpose of Tower Ltd
AU Section 317 – Illegal acts by clients: The client company has violated these rules
and specific actions could be taken against them. Under this section, Larry can inform this act of
the client to the court where the court will identify whether this act is illegal or not. This
violation by the client is an indirect effect and not on the financial statement of the company
which makes I difficult for Larry to specify the exact reason for a breach (Aicpa.org 2020).
AU Section 110 – Responsibilities and Functions of the Independent Auditor: Under
this section, the independent auditor can detect the frauds made by the client and inform to the
court regarding it. As Larry has detected some scams and misleading statements from the client’s
side, he is allowed to approach the management for that (Aicpa.org 2020).
AS 2401 – Consideration of Fraud in a Financial Statement Audit: there is also a
chance that Tower Ltd had some financial statement frauds which were carefully detected by
Joe, and hence the company started putting allegation against Joe. This Section could be helpful
for Larry to discover the financial statement frauds and then inform the management about the
violation of the ethics by the company (Pcaobus.org 2020).
Ethics of auditors: The ethics should be maintained by the audit manager of the
company to maintain a good relationship with the senior audit manager instead of putting his/her
morals and occurring personal conflicts. It has violated ethical requirements (Default 2020).
Values of auditors: Being a senior auditor of the firm, Larry must inform the
management of the company about the violation and take strict actions against them. It is the

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duty of the internal audit manager as well to solve the personal conflict with Joe to maintain a
good relation in the market (Internal Auditor General Department 2020).
1.2.4 The alternatives
Larry can sort out the issue of putting allegations upon Joe by the client company so that
there are no more personal conflicts between the client and Joe, which may involve Larry as
well. The internal audit manager also misleads him which can get sorted by clearing the facts. By
this Larry can be able to remove conflict and earn respect which will help him to get good
reviews from the client and ultimately get the promotion (Misti.com 2020).
1.2.5 Comparing Values and Alternatives
The values of auditing support the fact that any misconduct or misleading act by the
Client Company should be reported by the auditor as soon as it comes into notice. However, if
Larry at first communicates with the client company and resolves the issue, then it will be more
beneficial for the client as well as for Larry. The reputation of the client company will remain
intact and Larry will get good reviews from the client’s side for maintaining secrecy.
1.2.6 The consequences of the act by Larry
As mentioned above that if Larry resolves the issue of the conflict between Joe and
Tower Ltd by communicating it with the client, then it will be beneficial for both Larry and the
client. However, it will be an act of violation from Larry as he will not inform the managers
about the fraudulent by the client.
1.2.7 Final decision
After the proper completion of the audit by Larry, he must first communicate with the
audit manager of Tower Ltd and solve the issue of personal conflicts. Larry shall try to resolve

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the issue as it will protect the reputation of Tower Ltd and its internal audit manager. But even
after the communication, if the client is not ready to solve the personal issues with Joe, then
Larry should take legal actions against them which will ruin the reputation of the company and
the internal audit manager as well. Larry should not become selfish for his promotional purpose
and hide the conflict, and instead, he should help his friend Joe to solve the personal conflict
with the client.
1.3 Conclusion
From the above discussion, it can conclude that the internal audit manager and the client
company had violated some ethics, principles and values. However, Larry should try to solve the
issues by communicating first and then taking specific actions against them if needed. It will help
the company to retain its image in the market and also help Larry to get good reviews from the
company.

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References:
ACCA Study Material 2020. AAA Model Ethical Decision Making - ACCA Study Material. [online]
ACCA Study Material. Available at: https://www.aglobalwall.com/aaa-model-ethical-decision-making/
[Accessed 23 Jan. 2020].
Aicpa.org 2020. [online] Aicpa.org. Available at:
https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00317.pdf
[Accessed 23 Jan. 2020].
Aicpa.org 2020. [online] Aicpa.org. Available at:
https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00110.pdf
[Accessed 23 Jan. 2020].
Default 2020. Ethical decision making. [online] Default. Available at:
https://kfknowledgebank.kaplan.co.uk/risk-ethics-and-governance/ethics/ethical-decision-making
[Accessed 23 Jan. 2020].
Internal Auditor General Department 2020. Objectives & Core Values. [online] Internal Auditor General
Department. Available at: https://www.internalaudit.go.ke/objectives-core-values/ [Accessed 23 Jan.
2020].
Misti.com 2020. Ethics and the Internal Auditor. [online] Misti.com. Available at: https://misti.com/internal-
audit-insights/ethics-and-the-internal-auditor [Accessed 23 Jan. 2020].
Pcaobus.org 2020. AS 2401: Consideration of Fraud in a Financial Statement Audit. [online] Pcaobus.org.
Available at: https://pcaobus.org/Standards/Auditing/Pages/AS2401.aspx [Accessed 23 Jan. 2020].
www.dictionary.com 2020. Definition of auditor | Dictionary.com. [online] www.dictionary.com.
Available at: https://www.dictionary.com/browse/auditor [Accessed 23 Jan. 2020].