You are an audit manager in Cedar & Co, responsible for the audit of Chestnut Co, a large company which provides information technology services to business customers. The finance director of Chestnut Co, Jack Privet, contacted you this morning, saying:
‘I was alerted yesterday to a fraud being conducted by members of our sales team. It appears that several sales representatives have been claiming reimbursement for fictitious travel and client entertaining expenses and inflating actual expenses incurred. Specifically, it has been alleged that the sales representatives have claimed on expenses for items such as gifts for clients and office supplies which were never actually purchased, claimed for business-class airline tickets but in reality had purchased economy tickets, claimed for non-existent business mileage and used the company credit card to purchase items for personal use.
I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct. We will prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this potential assignment？’
Chestnut Co has a small internal audit department and in previous years the evidence obtained by Cedar & Co as part of the external audit has indicated that the control environment of the company is generally good. The audit opinion on the financial statements for the year ended 31 March 2011 was unmodified.
Required:
(a) Assess the ethical and professional issues raised by the request for your firm to investigate the alleged fraudulent activity. (6 marks)
(b) Explain the matters that should be discussed in the meeting with Jack Privet in respect of planning the investigation into the alleged fraudulent activity. (6 marks)
(c) Evaluate the arguments for and against the prohibition of auditors providing non-audit services to audit clients. (6 marks)