1. Professional standards do not prohibit auditors and client personnel from being friends. The turning point for when an auditor-client friendship violates the auditor independence rule is when the auditor is not longer independent in fact and auditor becomes less skeptical. An auditor’s independence is impaired when, in light of all relevant facts and circumstances, a reasonable investor would conclude that the auditor would not be capable of acting without bias. Mei-ya Tsai should have used professional skepticism when learning about the inventory in transit.
An auditor and their client can maintain a friendship until the auditor starts over looking red flags and lacks professional skepticism. An audit-client friendship will still affect the concept of independence because even if the auditor remains independent in fact, the investing public might not believe so.2. Yes, this should have presented an independence problem for BDO Seidman. Under presently existing accounting standards the audit manager cannot accept a “key position” (Chief Accounting Officer) with the audit client without a one year cooling off period.4.
I do not think Jill made the appropriate decision because the inventory was the key area that was susceptible. The client’s inventory was questionable from the beginning of the audit. Auditors should spend the most time and other resources on the procedures that yield the greatest quantity and quality of evidence. For example, in the Health Management case, if the audit team would have spent more time on the inventory they would have been able to obtain more evidence and ultimately discover the fraudulent increase in inventory.
5. Yes, the results of inconclusive audit tests should be included in audit work papers. The tests should be documented in the event the auditor gets sued, such as in the Health Management case. When Jill Karnick stated that she performed an inconclusive audit test, an inventory rollback, she was unable to prove her attempt because it was not indicated in the audit work papers.
