AC504 Unit 10 Professional Judgment Paper Example

A Bankruptcy Before the Report Date: A Unit 10 Professional Judgment Paper on Subsequently Discovered Facts

[Student Name]

Purdue University Global

AC504: Ethical Issues in Business and Accounting

Unit 10 Professional Judgment Paper

[Instructor Name]

[Date]

The HVAC wholesaler, the audit firm, its people and every figure are composite; the standards, code and textbook cited are real.

The Decision

She will put her concern to the partner in writing today, propose that the firm discuss the facts with the client's management this week, and, if the partner declines, take the matter to the firm's consultation partner under the firm's policy on differences of opinion. She will not wait for next year's audit, and she will not go around the firm to the client or the bank herself.

Facts

Fieldwork ended on March 10. The report was dated March 14 and released to the client, which sent it to its bank as required by its loan agreement. The wholesaler's largest customer, a mechanical contractor, filed for bankruptcy on March 3, owing $2.9 million, about 14 percent of receivables. The audit team did not know. On April 2 the manager found an email in the client's correspondence file, provided for another purpose, showing that the client's finance chief knew of the filing by March 6. The allowance for doubtful accounts at December 31 included nothing specific for this customer. Materiality was $420,000. The same day she raised it with the partner, who suggested addressing the receivable in next year's audit, since "the bank will see the write-off then anyway."

The Standards

When an auditor becomes aware, after the report is released, of facts that existed at the report date and that might have caused the report to be revised had they been known, the auditor must discuss the matter with management and determine whether the statements need revision (American Institute of Certified Public Accountants [AICPA], 2012). If they do, the auditor considers how management will inform users and, if management does not act, takes steps to prevent further reliance on the report, which can include notifying the bank.

Here the bankruptcy existed at the report date, March 3 being before March 14, and it bears on the December 31 allowance because the customer's financial condition at year end was what led to the filing. An uncollectible receivable of $2.9 million is nearly seven times materiality. The statements likely need revision.

The firm's quality management system requires consultation on difficult or contentious matters and a route for settling disagreements between team members (AICPA, 2022). The professional code bars members from subordinating their judgment to others (AICPA, 2014).

Next year's audit cannot fix this year's report, because the bank is relying on this year's statements now, with a $2.9 million receivable that the client already knew was in a bankrupt customer's estate when the opinion was signed.

Objections and Answers

The bank will see the write-off next year. True, but the bank is making lending decisions now, and the covenant calculations it is relying on include a receivable that is almost certainly worthless. Waiting does not avoid harm; it chooses who bears it.

The team followed procedures; the client concealed the filing. Possibly, and that matters for the firm's own exposure. But the standard does not ask whose fault the gap was. It asks what the auditor does once she knows.

Raising it will damage her promotion. It may. But the firm's consultation policy exists precisely so that a manager does not have to choose between her career and the standards. Using it is the path the firm itself designed. A partner who would penalize its use is a problem the firm needs to know about.

She could tell the bank herself. No. Confidentiality and the standards place the communication with users in the firm's hands, through management first. Going around the firm would breach her obligations and take a decision that belongs to the engagement partner and, if he fails, to the firm.

What Happens Next

If the partner agrees, the firm meets the client's management, which should revise the statements, increasing the allowance, and reissue them with a new report, and notify the bank. If management refuses, the firm notifies the bank that its report should no longer be relied on. If the partner does not agree, the consultation partner decides. In every branch, the manager documents each step and date (Arens et al., 2020).

The Firm's Own Exposure

The firm should also consider what the discovery means for its own work. The audit team requested confirmations from the largest customers but accepted a confirmation from the mechanical contractor dated February 20, before the filing. Its subsequent events procedures included an inquiry of management on March 14, when the finance chief said nothing about the bankruptcy. If the finance chief knowingly withheld the filing, the representation letter he signed on March 14 was false, which raises its own questions about the client relationship. The consultation partner should review whether the team's procedures were adequate and whether the firm can continue to rely on this management's representations next year.

None of this changes the immediate decision. Questions about the team's procedures and the finance chief's honesty can be answered after the users of the report have been protected, not instead of protecting them.

How She Should Write to the Partner

The written note matters because it fixes the facts and the timeline. It should state what she found, when, and where; attach the email; quote the standard's requirement in plain terms; and propose the meeting with management. It should be respectful and brief. It should not accuse the partner of anything, because the partner's suggestion may have come from not yet seeing that the filing predated the report. Giving him the chance to reconsider with the dates in front of him is both fair and more likely to work than an escalation he hears about second.

If he still disagrees, her note to the consultation partner should repeat the same facts, add the partner's response and ask for a decision by a stated date, since every day of delay is another day the bank relies on the report.

She should keep her own dated copy of each note she sends.

Why This Is the Right Judgment

Professional judgment is not choosing whatever seems reasonable; it is reaching a conclusion the standards and the facts can support and carrying it through the channels designed for it. Her decision does not require courage beyond writing an email and booking a meeting. It requires refusing to treat a known problem as next year's business.

References

American Institute of Certified Public Accountants. (2012). Subsequent events and subsequently discovered facts (AU-C Section 560). AICPA.

American Institute of Certified Public Accountants. (2014). AICPA code of professional conduct. AICPA.

American Institute of Certified Public Accountants. (2022). A firm's system of quality management (Statement on Quality Management Standards No. 1). AICPA.

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.