Question

Assume you are an auditor on an engagement for Treadway Industries and you believe the allowance for doubtful accounts is inadequate and should be raised by 250,000. You have gathered data to support this. The CFO believes the allowance is adequate and discusses this with the senior auditor and they agree to raise the allowance by100,000. You believe that this may result in a material misstatement. Which of the following steps should you take next?

1) Report your concerns to higher levels of management of your firm.
2) Do nothing and accept the decision of the CFO and the senior auditor.
3) Discuss your opinion and reasoning with the senior auditor.
4) Report your concerns to Treadway's Board of Directors.

Answer 1

Professional protocol dictates that discussing concerns directly with the senior auditor is the first step, followed by escalating the issue to higher management within the firm if necessary.

Step-by-step explanation:

When faced with a situation where you, as an auditor, believe that the allowance for doubtful accounts is inadequate contrary to the belief of the CFO and senior auditor, the most appropriate course of action is to discuss your opinion and reasoning with the senior auditor. This step adheres to professional standards and gives you the opportunity to present the data you have gathered to support your suggestion to increase the allowance by $250,000. If the senior auditor still disagrees with your assessment, the next step would be to report your concerns to higher levels of management within your firm, as they have the authority and responsibility to address potential material misstatements in financial reporting. Reporting to Treadway's Board of Directors or doing nothing would not be the correct immediate steps to follow.