Question

Assume Margaret's firm discovers undetected fraud in the previous years' financial statements, what should she do?

Required information [The following information applies to the questions displayed below) Reauditing Financial Statements Margaret Dairy is a CPA and the managing partner of Dairy and Cheese, a regional CPA firm located in northwest Wisconsin. She just left a meeting with a well-respected regional credit union headquartered in her hometown. Margaret was asked whether her firm would be willing to reaudit the previous years' financial statements and subsequently, conduct an audit of the current years' financials. This is the first time Margaret has been asked to conduct a reaudit. although she realizes it has become more common as a result of problems like Enron and WorldCom experienced. Some companies switching auditors have elected to have the new audit firm re-examine prior period financial statements because of concerns about the quality of the earlier audit. On her way back to the office, Margaret calls her brother Mark, who is a Senior Audit Manager at a firm in Margaret's hometown, to share her good news. She tells him that doing the audit work for the two years will increase her firm's revenue by 10 percent. Mark is taken aback by the news. The new client was a client of Mark's firm. He did not know the firm had lost the client and it might be picked up by Dairy & Cheese. Assume Margaret's firm discovers undetected fraud in the previous years' financial statements, what should she do?

Answer 1

Initial actions are crucial to the eventual outcome of a fraud investigation, Margaret should assess the extent of fraudulent activity in previous years at the credit union and compile sufficient evidence in order to prove that the fraud had actually taken place. It is important that Margaret not share the findings of her investigation with her brother in order to maintain confidentiality regarding the matter as he was involved in the client’s previous years audits. Once she has the necessary evidence she should approach the management and those charged with governance of the credit union and report the findings of the reaudit.