THE AUDITOR AS WHISTE BLOWER

Unless audit staff handles audit correctly they may can identify the triggers of whistle blower
mechanism. if they tell the audit partner. But if the revelation is not shared with the audit
partner then the quality of the audit may be in jeopardy. Before looking closer at the how
you can prepare your auditors and audit team members for a whistleblowers revelation, it is
useful to look at the benefits of protecting whistleblowers. Corporate cultures of silence,
which allow wrong doing to go undetected, are seen as contributing to the recent round of
local and international corporate failures. A regime protecting whistleblowers is seen as part
of the answer because it encourages reporting of contraventions by employees.
The auditor should be friendly to attract the whistle blower triggers.
Whistleblower legislation is becoming increasingly common. It has traditionally been more
common in the public sector than the private sector. But in the late 1990s it started to
become part of the international regulatory response to corporate fraud, particularly
covering up such fraud in the financial reports. In the USA the Sarbanes-Oxley Act gives
whistleblower protection for corporate employees and mandates companies establish
procedures to permit anonymous reporting by employees. It places the obligation to
establish these on the audit committee.
In the United Kingdom, the Combined Code of Corporate Governance establishes whistle
blower protections and recommends audit committees have whistleblower arrangements for
financial reporting irregularities.

In the audit of a concern the auditors responsibility is to express opinion on the financial
statements that whether they are free from material misstatement which is caused by error
or fraud. The primary responsibility to detect the fraud is of the management and the auditor
is not the sole responsible person to detect the fraud but when he comes through the fraud
he should consider the effect of fraud on the financial statements and should report to the
appropriate levels whether management or Those who charged with governance.
There three sources of fraud,
1. Incentive or pressure - Management or employees are under an incentive or pressure,
which gives the motivation to commit such a fraud.

2.Opportunity - Due to lack of presence controls or non presence of controls gives the
persons an opportunity to commit an fraud.
3.Rationalization / Attitude - Due to weak personal code of ethics the attitude of persons
could be that to commit such an fraud.
The auditor should maintain the professional skepticism that means the auditor needs to set
apart the past relationships with the client and should assess the client financial statements
independently.
The auditor should take decisions based on the audit evidences which can be external or
internal, past experiences and the integrity of management.
So mere the an employee is reporting that the manager in operations is earning much for
the past 2 years it can not be assumed that the manager is involved in the fraud.
There can be many reasons for the increased financial status of the manager for example
incentives from the company, other incomes, stock market gains etc..
There can be reasons for taking only two suppliers into consideration may be there can be
better prices are being offered by the suppliers or there may be lack of suppliers in the
market over a period of time etc
The auditor shall obtain audit evidence regarding there issues and shall analyze that
actually fraud existed or not. There may be a chance that the reporting employee may have
grudge on the manager or the information is falsified.
It is the responsibility of auditor to look into such matters

cost of new equity using the dividend growth rate is:

(Dividend / (Price * (1-Flotation Cost) ) + Growth Rate

The general trend among state governments is to allow the use of no par value stock,
since the practice of issuing par value stock at the absolute minimum amount has
essentially eliminated the reason for having par value. Thus, we may eventually see
the elimination of the par value concept as it relates to company stock.

The use of no par stock does not apply to other types of securities, such as bonds,
where the par value is essentially the same as the face value of the instrument.
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Caluclation of NPV,
discount rate = 10 yr treasury bond yeild as on 10.41 AM on 07/05/2016 + 7% = 1.39% +
7% = 8.39%
Caluclation of net cashflows every year,
Net
operati
fixed
Sales
ye with

manufactu operati ng
ring cost ng cost profit

ar inflatio with
na

operati

with

ng
Tax

revenu

savings

e=

on

Tax expense

depreciat
inflation b inflatio D =aion
b-c
nc

operati
ng
profit tax
expen

Worki
ng
capita
l base
=
10%

Net
cash
inflow

of
sales

se
1

50,000 50000 *

150,00 =

* 35 = 25.2 =

1750,0 1260000
00

40000*0. 340,000-

340,00 175,0 66,60

340,00 3 =

12,000 =

328000 * 30% 98400

12000

= 98400

0=
241,60

00

10

18375
00

19293
75
20258
44
21271
36
22334
93
23451
67
24624
26
25855
47
27148
24

1304100

1349743

1396984

1445879

1496485

1548862

1603072

1659179

1717251

15375 379,65
0

15759 422,03
4

16153 467,32
4

16557 515,68
2

16971 567,29
1

17395 622,35
4

17830 681,05
3

18276 743,60
0

18732 810,24
9

40000*0.
3=
12000

37965012000=36765 26935 18375 8560

0*0.3 =

123011

12000
40000*0.
3=

136598

12000
40000*0.
3=

151105

12000
40000*0.
3=

166589

12000
40000*0.
3=

183105

12000
40000*0.
3=

200715

12000
40000*0.
3=

219482

12000
40000*0.
3=
12000

110295

40000*0.
3=

239473

29902 19293 1060

7

90

33072 20258 1281

8

44

36458 21271 1518

0

67

40070 22334 1773

8

59

43924 23451 2047

6

29

48033 24624 2340

6

93

52412 25855 2655

6

71

57077 27148 2992

1

89

year

cashflow

PVF@ 8.39%

Discounted cashflow

- $400,000

- $400,000

66,600

0.9226

61445.16

85605

0.8512

72866.98

106090

0.7853

83312.48

128144

0.7245

92840.33

151867

0.6684

101507.9

177359

0.6167

109377.29

204729

0.5689

116470.33

234093

0.5249

122875.41

265571

0.4843

128616.03

10

299289

0.4468

133722.32

10

10,000

0.4468

4468

NPV

1,023,034.23

Caluclation of profitability index = PV of infows / PV of outflows = 1,423,034.23 / 400,000 =

5.495
IRR is caluclated by me on trail and error basis IRR = 18.7544%
Payback period = 4 years + 92840.33 / 101507.9 = 4.88205 years
The project can be accepted in all ways because NPV is positive , Porfitability index is more
than 1, IRR is more than cost of capital, payback period is also lesser.
NOTE - since it is an large solution it might have arthametical errors.

#johnsonenterprises #uses a computer to handle its sales invoices, lately business

so has been good that it takes an extra 3 hours

existing
machine
Operating costs
new machine cost
(depreciation)
salvage value

24,880
-

new machine
19,720
24,960 - 0 / 5 =
4992

Net income increase /

(decrease)
$5,160
(4992)

9750

9750

Net income

= 9,918

The current machine should be replaced. since the net income from new machine is higher
than the older one.
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