During the Audit of a Corporation's Major Division,an Auditor Interviewed

question 50

Essay

During the audit of a corporation's major division,an auditor interviewed an accounting clerk.The clerk told the auditor that she believes that the division has been capitalizing research and development expenses (GAAP requires that all R&D costs be charged to ordinary expense in the period in which they are incurred).R&D is a significant part of the division's budget.If this information is found to be true,the division may have to expense millions of dollars previously capitalized and significantly reduce its operating profit.The auditor has not performed any testing to determine whether this problem actually exists but has discussed the potential problem with the division controller and you,the director of internal audit.
The following day,you received the following e-mail from the company president:
The controller of Division B informs me that you have discovered a questionable account classification dealing with research and development expense.I am aware of the issue.You are directed to discontinue any further investigation of this matter until I inform you to proceed.Under the confidentiality standard of your profession,I also direct you not to discuss this matter with other managers,the audit committee,or the outside auditors.
As the director of internal audit,write a short memo in response to the president's e-mail.Be sure to explain the position you are taking and why this position is appropriate.

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Definitions:

MAUT

Multi-Attribute Utility Theory, a decision-making framework that evaluates choices based on multiple criteria.

Image Theory

A descriptive theory of decision making positing that the process consists of two stages: (1) a noncompensatory screening of options against the decision maker’s image of values and future, in which the number of options is reduced to a very small set, and (2) a compensatory choice process (if necessary).

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.

Wason Selection Task

A logic puzzle that demonstrates the difficulty people have in testing rules in a rational or logical way, often used in the study of deductive reasoning.