The fraud at high flying corporations: Developing audit interview skills
University of St. Thomas, Minnesota
UST Research Online
Accounting Faculty Publications Accounting
7-2015
The fraud at high flying corporations: Developing
audit interview skills
Diane Matson
University of St. Thomas, Minnesota, XXXXXXXXXX
Kristine Sharockman
University of St. Thomas, Minnesota, XXXXXXXXXX
Janice Raffield
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1
The Fraud at High Flying Corporation: Developing Audit Interview Skills
Diane M. Matson, Kristine M. Sharockman and Janice M. Raffield
University of St. Thomas
Diane M. Matson, Ph. D., CFE, CPA (inactive)*
Associate Professor, Department of Accounting
University of St. Thomas
2115 Summit Avenue
St. Paul, MN XXXXXXXXXX
E-mail address: XXXXXXXXXX
Phone number: XXXXXXXXXX
Fax number: XXXXXXXXXX
Kristine M. Sharockman, MBA, CPA
Program Director, Masters of Science in Accountancy
University of St. Thomas
1000 LaSalle Avenue
Minneapolis, MN XXXXXXXXXX
E-mail address: XXXXXXXXXX
Phone number: XXXXXXXXXX
Fax number: XXXXXXXXXX
Janice M. Raffield, Masters of Public Accounting, CPA
Associate Professor, Department of Accounting
University of St. Thomas
2115 Summit Avenue
St. Paul, MN XXXXXXXXXX
E-mail address: XXXXXXXXXX
Phone number: XXXXXXXXXX
Fax number: XXXXXXXXXX
*Co
esponding Autho
Data files (Word and Excel files with the case materials) are available upon request.
mailto: XXXXXXXXXX
mailto: XXXXXXXXXX
mailto: XXXXXXXXXX
2
The Fraud at High Flying Corporation: Developing Audit Interview Skills
ABSTRACT
This instructional case is designed to simulate a real world audit situation where red
flags, primarily related to the existence assertion and related party transactions, have been
uncovered and additional information must be obtained from the client, High Flying Corporation.
Each student individually interviews a client official who is portrayed by a practicing accountant
from the business community. This case provides students with an opportunity to make real-
time judgments regarding the validity and reasonableness of information provided by a client and
to determine an appropriate course of action, while simultaneously dealing with client behaviors
intended to evoke negative emotional reactions and to undermine their confidence. This case is
appropriate for advanced auditing at the undergraduate level, forensic accounting at the
undergraduate or graduate level, or introductory or advanced auditing at the graduate level.
Keywords: client interview; audit; forensic accounting; fraud
I. INTRODUCTION
This case simulates an audit client interview. Based on an actual audit fraud, the case
includes several “red flags” for students to identify and investigate. Analytical procedures
involving both financial and non-financial data are useful in helping students identify key issues
in the case. Students need to ask questions effectively in order to make professional judgments
about the reasonableness of the financial statements and the information provided by the client;
simultaneously, students experience real time pressure and client behaviors intended to evoke
negative emotional reactions and undermine their confidence.
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Each student interviews a client portrayed by a practicing accountant from the business
community. The accountants portraying the client are asked to display behaviors that clients
seeking to conceal information might actually exhibit. The participation of practicing
accountants helps to simulate a realistic audit environment where young auditors are expected to
perform under pressure.
Each student’s interview is videotaped. The instructors review each interview and select
one or more excerpts to include in a DVD that will be used to demonstrate both effective and
ineffective inquiry techniques during a follow-up session. Selected excerpts are intended to
capture the complex dynamics that may occur between the client and the auditor during an
interview particularly when the client is attempting to conceal a fraud. Excerpts usually
demonstrate: (1) the client evading questions by discussing unrelated issues; (2) the client
providing information that is inconsistent with data in the workpapers; (3) the client making
statements which conflict with prior statements; (4) the students leading the client, answering
their own questions or failing to properly ask follow-up questions; (5) the students appropriately
edirecting the dialogue; (6) the students asking strong follow-up questions; and (7) the students
maintaining a calm professional demeanor. The DVD with excerpts is shown in a follow-up
session that provides students with constructive feedback on their performance and helps them
eflect on their experience.
This case introduces effective client inquiry skills and the concept of emotional
intelligence through a role playing exercise. Students practice and analyze effective interviewing
techniques and, as importantly, identify and analyze ineffective techniques. The case can also be
used as a written assignment, instead of or in conjunction with an interview simulation.
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The paper is organized into two major sections. In the first section, we give an overview
of the case and provide the case materials. These materials include client information, financial
statements and various details relevant to the audit. (Note: the data files, which are Word and
Excel files, are available upon request from the co
esponding author). In the second section, we
present the teaching notes, which include the learning objectives, instructional approach, and
implementation ideas. The teaching notes also give case instructions, suggested assignments and
solutions, and excerpts from representative interviews. (Note: the teaching notes are available
upon request from the co
esponding author).
II. CASE MATERIALS
Purpose of Case
The purpose of this case is for you to assume the role of an audit senior. As such, you
will focus on cash, accounts receivable, sales revenue and property, plant and equipment for a
client with a fiscal year-end of June 30, XXXXXXXXXXYou will be given background information,
financial statements, various schedules, a bank statement and cash confirmation, and a charter
agreement.
List of Case Materials
The list of case materials is as follows:
Exhibit A: Memorandum for Planning Meeting
Exhibit B: Draft of President’s Letter
Exhibit C: Audit Program—Cash
Exhibit D: Audit Program—Sales Revenue and Accounts Receivable
Exhibit E: Statements of Income
Exhibit F: Balance Sheets
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Exhibit G: Schedule of Trade Accounts Receivable
Exhibit H: Schedule of Monthly Sales Revenue for Year ending June 30, 2014
Exhibit I: Schedule of Sales Revenue for the Month ending July 31, 2013
Exhibit J: Schedule of Sales Revenue for the Month ending June 30, 2014
Exhibit K: Schedule of Aircraft
Exhibit L: Bank Statement and Standard Bank Confirmation
Exhibit M: Terms and Conditions for all Charter Agreements
Exhibit N: First Assignment for Case
Exhibit O: Second Assignment for Case
Exhibit P: Third Assignment for Case
Overview of Client
The client, High Flying Charter Company (HF), is a privately-held aviation company
ased at Holman Field, an airport near downtown St. Paul, Minnesota. Its main line of business
is providing air charters for executives and groups, primarily to four large customers. HF has
nineteen employees. The major shareholders are also employed as top executives. The primary
contacts at the client are Mr. Calvin Kemper, Chief Executive Officer (CEO) and Ms. Valerie
Walsh, Chief Financial Officer (CFO). More information on the client is found in Exhibits A
and B.
The CPA Firm
Smith Franklin CPAs LLP, a regional CPA firm, specializes in small manufacturers and
distributors. This is the first year that the firm has conducted HF’s audit. La
y Lemay is the
audit partner. More information on the CPA firm is found in Exhibit A.
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Purpose of Audit
The client needs an audit as a condition of its debt agreement and in anticipation of
seeking new private investors. More information on the audit is found in Exhibit A.
Industry Information
The charter flight industry is greatly affected by economic conditions and travel related
trends. The industry has started to recover after some tough years, and industry revenues are
expected to grow during the fiscal year ending June 30, XXXXXXXXXXThe audit team will need to assess
how the market pressures faced by the industry will impact HF’s ability to achieve its projected
aggressive revenue growth. In addition, the industry faces significant regulation by government
agencies. More information about the industry is found in Exhibit A.
Assignments
Interview Format. Your professor may require you to prepare for and conduct an interview of
the client contact. If so, there are two related assignments. The first assignment, Exhibit N, is an
individual assignment. It involves preparing for an interview with someone portraying either
Mr. Kemper or Ms. Walsh and conducting this interview. To prepare for this interview, you
should carefully review and analyze the Exhibits, looking for unusual amounts, patterns and
activities, while considering the client and the industry. Compile a list of questions to ask the
client person. When you conduct the interview, take notes. Be sure to follow up on answers that
are confusing, incomplete or inconsistent.
The second assignment, Exhibit O, is a group assignment. It involves reflecting on the
information received in the interview and identifying additional questions and concerns.
Written Format. Your professor may require some written evaluation and analysis of the case
materials, in addition to, or in place of, preparing for and conducting an interview of the client
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contact. If so, there is one related assignment, Exhibit P. In this