Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 4-1 KBC Solutions
The audit of KBC Solutions by Carlson and Smith, CPAs, was scheduled to end on February 28,
2016. However, Rick Carlson was uncertain whether it could happen. As the review partner, he
had just completed going over the work paper files of the senior auditor in charge of the
1. Why did you approve the accounting for new acquisitions of plant and equipment that
were not supported by adequate underlying documentation?
2. Why did you accept the client’s determinations of accrued expenses rather than make
your own independent judgments?
3. How can you justify relying on last year’s work papers to determine the proper allowance
for uncollectibles one year later?
To say Grace was stressed out would be an understatement. This was her first engagement as a
senior and she wondered whether it would be her last. Grace knew she had to make a convincing
case for her judgments or suffer the consequences. She responded to each point as follows.
2. The client seemed to have a reasonable basis for those judgments so she saw no reason to
delay completion of the audit over the accrued expenses.
3. Although the confirmation rate on the receivables was slightly below expected norms,
there was no reason not to accept the client’s explanation for those not confirmed as
being correct in amount and due date.
Questions
1. Critically evaluate the judgments made by Grace as the senior by using the KPMG
Professional Judgment Framework.
Grace lacks the requisite professional skepticism to meet the ethical standards under the
AICPA Code. She did not exercise due care by accepting the client’s explanation for
Judgment occurs in a setting of uncertainty, risk, and often conflicts of interest. These
factors are present in the KBC Solutions audit. First, Grace is uncertain whether the three
issues raised by Rick could be adequately addressed by her given the uncertainty of not
having obtained adequate documentation from the client and accepting client judgments.
Risk exists because of the tenuous nature of the underlying documentation. A conflict of
interest may occur if Grace aggressively challenges the client’s explanations for
recording the transactions.
objectively and independently, with inquiring and incisive minds. Professional skepticism
is required by auditing standards. It requires an objective attitude that includes a
questioning mind and critical assessment of audit evidence. Grace’s mindset was to get
the audit done as quickly as possible, which is not consistent with the KPMG framework.
We could say that Grace was reasoning at stage 2 of Kohlberg’s model in trying to satisfy
2. Did Grace violate any rules of conduct in the AICPA Code? Explain.
Ethical Obligations and Decision Making in Accounting, 4/e 3
3. Does Rick have any ethical obligations in this matter? What should he do about
signing off on the audit and why?
Rick is the review partner. As such he does have an ethical obligation to carefully review
the audit procedures followed by the team including their judgments. As the supervisor,
he comes under the due care standard (1.300.001) and must ensure that professional
skepticism has been applied in all stages of the audit especially evaluating audit evidence
and management’s representations.