please do paraphrases for the following questions and answers. Note: the accounting terms must be the same and the meaning.
1. The Improper payments made by the APC occurred during the time frame that Andrea Jung served as Avon’s CEO. Was she “responsible” for those payments even if she was unaware of them? Why or why not?
In a sense, Andrea Jung as CEO should be held responsible for those payments even if she was “unaware” of them. Both of Jung’s parents were born and raised in China, and I am sure Jung is very aware of the culture and how they do business in that country. As stated, she is a smart woman, especially when it comes to marketing and international business. Going into this market penetration strategy for China, she was well aware that Avon is a direct selling business and in 1998 the Chinese government had outlawed the “direct selling” of merchandise. It seems as if her bias and personal ties to the Chinese culture got in the way of her ethics. She knew that this market was not going to be successful for Avon since they ban what their whole company is based upon, yet she decided to go forth with the strategy. In the case study, it states Jung was willing and convinced to do anything to maximize their sales in China, even if it means to regain direct selling in the country. Jung created a “Direct Selling Task Force” for Avon Products China (APC), which she became very attached to. Jung became personally involved in Avon’s goal of convincing the Chinese government to lift its ban on direct selling. She even travelled to China to personally meet with high-ranking Chinese government officials to discuss the issue with them. So while she says she had no clue, Jung definitely was aware of the cultural ways and how bribes were a norm. She was very involved and therefore knew what was going on. We believe she is responsible, as her actions speak volumes.
2. Identify the role and responsibilities that an internal audit staff typically assumes in a company’s internal control system.
An internal audit staff assumes some very important roles and responsibilities. They can be found in audit section 322. The section lists the responsibilities of “providing analyses, evaluations, assurances, recommendations, and other information to the entity’s management and board of directors.” One important responsibility the section discusses is the monitoring of an entity’s controls. Watching a business’s controls take place is one of the most reliable ways to confirm that they are working properly. This will also give the auditor a better understanding of the internal controls and how they work. They will then review the effectiveness and efficiency of the internal control system. If the system is not effective they can make recommendations on how to improve the internal controls. One very important responsibility that would have gone a long way in the Avon case is to make sure the company is complying with all relevant laws and regulations. It is up to the internal auditor to make sure the company is not breaking any laws.
3. The IMA Statement of Ethical Professional Practice identifies four ethical standards, three of which are competence, confidentiality, and integrity (see “Ethics Center” on IMA website). Relying on those three ethical standards, evaluate the conduct of Avon’s internal audit staff during the company’s initial investigation of the questionable payments made by APC.
The first ethical standard the IMA identifies is competence. The IMA defines this as maintaining professional leadership and expertise, performing duties in accordance with relevant laws, and providing accurate decision support information. There were some instances where Avon failed to meet the competence standard. Part of the competence standard states that the internal auditor must provide decision support information and recommendations. During the investigation the case does state that remedial measures were discussed and recommended, but they were never implemented. It should have been on the internal auditors to give detailed recommendations. The case also mentions that they failed to devote adequate funding, staffing and resources to Avon China. This is a huge lack of competence and shows poor professional leadership.
The next ethical standard the IMA lists is Confidentiality. The IMA defines this as keeping information confidential except when disclosure is required, informing all relevant parties appropriate use of confidential information, and not using confidential information in an unethical or illegal way. The internal auditors at multiple times discovered that their was questionable payments occurring. These payments continued and the internal auditors new that they were continuing. The were instructed to keep this information and not inform the required parties. The CEO at the time Andrea Jung did not end up hearing about this until a year later.
The third ethical standard mentioned is integrity. The IMA defines integrity as mitigating conflicts of interests, communicating with business associates to avoid conflicts of interest, refraining from conduct that would be unethical or discredit the profession, and contribute a positive ethical culture. One problem found in this case involving the integrity of the internal auditors was their response to the legal staff. The internal auditors should have known that the legal staff was trying to cover up the questionable payments that were occurring. This can easily fall under supporting an activity that could discredit their profession. They blindly followed the legal department’s conclusion that the FCPA is not under the scope of internal audit.
4. Do you agree with Avon’s corporate legal staff that the potential FCPA violations were a legal issue and not and internal audit issue? Explain
We do not agree with Avon’s legal staff when they say that this is a strictly legal issue. Although it is a legal issue because Avon’s actions violated the FCPA, it is also a internal audit issue because the internal audit team should have recognized that this money was being paid out. In a sense, this all stemmed from the internal audit team disregarding notices and warnings that there was potential FCPA violations happening in their Chinese subsidiaries. If they reported it right away, it would have not only been the right thing to do, but also could have mitigated the risks of it becoming a large legal issue. The internal audit team is responsible for flagging and reporting such issues, not sweeping it under the rug until it blows up into a large scandal.
5. The COSO internal control framework identifies five components of an entity’s internal control. Which, if any, of those five components of Avon’s internal control were flawed? Explain. If there were multiple flaws in Avon’s internal control, identify which one you believe was most serious and defend your choice.
– Information & Communication: This area of Avon’s internal control was flawed because after uncovering that they payments were in fact being made to Chinese government officials in 2005, Avon’s global internal audit staff thought about offering training to employees regarding the provisions of the FCPA, but it was never implemented due to budgetary limitations. Thus, Avon knew what was going on and they never took measures to inform their employees that their practices might be acceptable in their home country, however working for a U.S. Company, those bribes were not allowed.
– Monitoring: In December 2006, Avon’s global internal audit staff completed some follow-up work regarding this matter and discovered that the same questionable activity was still taking place. There was no monitoring or evaluations that the deficiencies within the internal control were changed to legal practices.
– Control environment: A major feature of this component is demonstrating a commitment to integrity and ethical values. This is this most serious flaw in Avon’s internal control because this encompasses all of the above internal control flaws. Avon discovered that there were illegal bribes being paid to Chinese government officials, thought about informing their employees that is was unacceptable but then chose not to, and finally was surprised when the bribes continued for another year. Nowhere in this situation was integrity expressed as they let their employees continue illegal practices they had no clue violated FCPA. Ethics were also completely disregarded after the company willingly allowed for the bribes to continue after discovering they were happening on two separate occasions.
1. The PCAOB’s Interim Standards identify auditor’s responsibilities when addressing the possibility that fraud has materially impacted a public company’s financial statements. Identify in bullet format the key instances in which the L&H auditors apparently failed to comply with these responsibilities during the 2005 and 2006 Locate plus Audits.
” The L&H auditors failed to conduct professional skepticism when they received the allegations of fraudulent transactions between their client and Omni Data. In the report by the SEC, they stated that the auditors had failed to adequately test the revenue from Omni Data, failed to obtain competent evidence that backed their opinion, and failed to assess the risk of material misstatements of these allegations (Knapp, 2010). When the auditors sent letters of confirmations they received an undeliverable notice. Later, they received the confirmation letter signed with no exceptions. They also were not a part of an online database that logs all the companies in that area where Omni Data was allegedly from. This should have prompted a more scrutinized audit test but instead they used confirmation letters and letter of representations from management as sufficient evidence to validate the transactions.
” The auditors also did not perform substantive testing on the large number of receivables. The auditors tested revenue from other channel partners by comparing amounts billed and recognized revenue to usage logs. If the company who had paid the royalties had not had any usage it would be a red flag. However, these tests were not performed to Omni Data which accounted for 75 percent of the company’s receivables. Even the fraud risk assessment form was left blank in the 2005 audit.
” L&H partners audit partners, Wood and Howley, had received allegations from a former board member and although these allegations were brought to the company’s audit committee, the concern about the company’s management team committing fraud was not. Communication between the audit managers and the audit engagement group and to the client is vital to conducting an audit because it can result in the discovery of misstatements or fraud (Bobek, Daugherty, & Radtke, 2012).
2. What is the purpose of predecessor-successor auditor communications? Which party, the predecessor or successor auditor, has the responsibility for initiating those communications? Briefly summarize the information that a successor auditor should obtain from the predecessor auditor.
The purpose of predecessor-successor auditor communications is to ensure that the prospective auditors receive all the relevant information before accepting the audit client. This will help them determine the risk level of a client, will help them determine whether they can conduct the audit, and help them determine whether they are willing to take on the risk (V.P., 2016). It also assists the prospective auditors in the planning process of the audit. Because it is helpful for the successor, they are the ones that should initiate contact with the predecessor. However, the successor must ask the audit client for permission.
The successor audit firm should request to know the reason that the predecessor is no longer the prospective client’s auditor. In the case of LocatePlus, their predecessor auditors resigned because they were too high risk. In the resignation letter, the predecessor audit firm had concerns about the timeliness of information they received and the reliability of the management representations. When the predecessor auditors sat with the successor auditors they mentioned that it was difficult attaining the information required of the client’s management team. They also emphasized that management was contradictory in the facts they gave and provided items like unsigned contracts to them as audit evidence. Thus, the successor audit firm should also gather information that may put into question managements integrity, any disagreements with management over accounting practices, and any communication that involves fraud or internal control issues (V.P., 2016).
3. What are the primary responsibilities of a “concurring partner” under current U.S. auditing standards?
The concurring partner reviews the judgements made by the engagement team and is responsible for approving the judgement. They conduct another level of analysis to make sure the audit and the conclusions followed GAAP and auditing standards. The concurrent partners review the quality of the audit and thus must be competent, independent, and must practice objectivity (PCAOB, n.d.). The concurring partner must evaluate the judgments including the substantive testing to high risk transaction and account balances, review audit differences, and evaluate the judgements made on the materiality of identified misstatements (PCAOB, n,d). They are also responsible for reviewing the opinion and evaluating the engagements team’s independence and engagement strategy. Concurring partners should also ensure that no matters of concern have remained unresolved.
4. What is the nature and purpose of a “letter of representations”? Comment on the quality or strength of the audit evidence yielded by a letter of representations?
Under Auditing standard 2805, The letter of representations is a requirement of the independent auditor to obtain a written representation from their client’s management (PCAOB, n.d.). This is necessary to make management teams accountable for the audit evidence and documentation that they present to their auditors when they are testing the reliability of the information on the financial statements. These statements can be written or oral. This letter does not substitute the audit testing that auditors must conduct to have a reasonable, basis for their opinion. In fact, when these representation letters reflect that management believes that there is a low likelihood or no knowledge of fraud, an auditor can be motivated to find contradicting evidences to the views and to perform professional due care (Harding & Trotman, 2017). It is the duty of an auditor to trust their client so that they do not offend them but to verify everything that is claimed. Thus, an auditor must perform professional skepticism. The written letter of representation usually just confirms representations about data on the financial statement given to the auditors. It assures that management acknowledges that the financial statements are represented fairly in accordance to GAAP and that the information presented to the auditors is true. It prevents from being a misunderstanding between the auditors and the company.
In the case of LocatePlus, the auditors were accused by the SEC of highly unreasonable conduct. They were accused of not adequately performing tests on Omni Data’s relationship to LocatePlus. Because there were allegations against the transactions from someone who was involved with their client before and their predecessor audit firm has warned them about their concerned of this customer, the auditors were requires to performs professional skepticism with high scrutiny. This would have meant to further test the revenue just as they had other revenue streams instead of allowing a confirmation letter from Omni Data and a letter of representation by LocatePlus’s management team to serve as sufficient document evidence. Unfortunately, the management team had been the people that created the fictitious company to inflate operating revenue. In the book of Romans, it states “For such persons do not serve our Lord Christ, but their own appetites, and by smooth talk and flattery they deceive the hearts of the naive” (Romans 16:18). The management teams of LocatePlus did just that, created a company and even generated cash transfers to deceive the auditors. When L&H partners became their auditors, they lied about the legitimacy of the company and knowingly gave the auditors fictitious contracts and letters of confirmations. They also signed the letters of representations claiming that they had no knowledge of Fraud. By doing so, they went against the teaching of the Lord and served their money hungry appetite
