CASE STUDY SCENARIOS
Case Scenario 1: Ethical Dilemma
A company auditor discovers a material misstatement in the financial statements of a client.
• However, the client's management insists on concealing the error to maintain positive investor
sentiment.
• How should the auditor navigate this situation, considering ethical guidelines and regulatory
obligations?
The auditor in this scenario is faced with a challenging ethical dilemma. On one hand, the auditor has a professional obligation to report any material misstatements found in the financial statements of a client to maintain the integrity and accuracy of financial reporting. On the other hand, the client's management is pressuring the auditor to conceal the error in order to avoid negative consequences, such as a decrease in investor confidence.
In this situation, the auditor should prioritize their ethical responsibilities and regulatory obligations over the client's requests. The auditor should carefully document the misstatement and discuss the issue with the client's management, emphasizing the importance of correcting the error to ensure the accuracy and transparency of the financial statements. If the client's management refuses to address the misstatement, the auditor should consider escalating the issue to higher levels within the client's organization and possibly even withdrawing from the engagement if necessary.
Ultimately, the auditor must uphold professional integrity and independence, even if it means risking the loss of the client's business. By acting ethically and in accordance with regulatory requirements, the auditor can preserve their professional reputation and credibility in the long run.