For each separate case, state whether the action or situation shows a violation of the AICPACode of Professional Conduct; if so, explain why and cite the relevant rule or interpretation.a. Your client, Contrary Corporation, is very upset over the fact that your audit last yearfailed to detect an $800,000 inventory overstatement caused by employee theft and falsification of the records. The board discussed the matter and authorized its attorneys toexplore the possibility of a lawsuit for damages.b. Contrary Corporation filed a lawsuit alleging negligent audit work, seeking $1 million indamages.c. In response to the lawsuit by Contrary, you decided to bring litigation against certain officers of the company alleging management fraud and deceit. You are asking for a damagejudgment of $500,000.d. The Allright Insurance Company paid Contrary Corporation $700,000 under a fidelitybond covering an inventory theft by employees. Allright is suing your public accountingfirm for damages on the grounds of negligent performance of the audit, claiming that aproper audit would have uncovered the theft sooner and the amount of loss would havebeen considerably less.e. Your audit client, Science Tech Inc., installed a cost accounting system devised by the consulting services department of your firm. The system failed to account properly for certainproduct costs (according to management), and the system had to be discontinued. ScienceTech management was very dissatisfied and filed a lawsuit demanding return of the $10,000consulting fee. The audit fee is normally about $50,000, and $10,000 is not an especiallylarge amount for your firm. However, you believe that Science Tech management operatedthe system improperly. You are willing to do further consulting work at a reduced rate tomake the system operate, but you are unwilling to return the entire $10,000 fee.f. A group of dissident shareholders filed a class-action lawsuit against both you and yourclient, Amalgamated Inc., for $30 million. They allege there was a conspiracy to presentmisleading financial statements in connection with a recent merger.g. CPA Ellis Lisa, a shareholder in the firm of Eden, Benjamin, and Block, P.C. (a professional accounting corporation), owns 25 percent of the common stock of Dove Corporation(not a client of Eden, Benjamin, and Block). This year, Dove purchased a 32 percentinterest in Tale Company and is accounting for the investment using the equity method ofaccounting. The investment amounts to 11 percent of Dove’s consolidated net assets. TaleCompany has been an audit client of Eden, Benjamin, and Block for 12 years.h. CPAs Mark and Ben Saliba are the father-and-son partners of Queens, LLP. They havea 12 percent joint private investment in ownership of the voting common stock of HydraCorporation, which is not an audit client of Queens, LLP. However, the firm’s audit client,Howard Company, owns 46 percent of Hydra, and this investment accounts for 20 percentof Howard’s assets (using the equity method of accounting).i. Drew Francie and Madison Brian, CPAs, regularly perform the audit of the First NationalBank, and the firm is preparing for the audit of the financial statements for the year endedDecember 31, 2017.(1) Two directors of the First National Bank became partners in Francie and Brian,CPAs, on July 1, 2017, resigning their directorship on that date. They will not participate in the audit.(2) During 2017, the former controller of the First National Bank, now a partner in Francie and Brian, was frequently called on for assistance regarding loan approvals andthe bank’s minimum checking account policy. In addition, the former controller conducted a computer feasibility study for First National
For each separate case, state whether the action or situation shows a violation of the AICPA
Code of Professional Conduct; if so, explain why and cite the relevant rule or interpretation.
a. Your client, Contrary Corporation, is very upset over the fact that your audit last year
failed to detect an $800,000 inventory overstatement caused by employee theft and falsification of the records. The board discussed the matter and authorized its attorneys to
explore the possibility of a lawsuit for damages.
b. Contrary Corporation filed a lawsuit alleging negligent audit work, seeking $1 million in
damages.
c. In response to the lawsuit by Contrary, you decided to bring litigation against certain officers of the company alleging management fraud and deceit. You are asking for a damage
judgment of $500,000.
d. The Allright Insurance Company paid Contrary Corporation $700,000 under a fidelity
bond covering an inventory theft by employees. Allright is suing your public accounting
firm for damages on the grounds of negligent performance of the audit, claiming that a
proper audit would have uncovered the theft sooner and the amount of loss would have
been considerably less.
e. Your audit client, Science Tech Inc., installed a cost accounting system devised by the consulting services department of your firm. The system failed to account properly for certain
product costs (according to management), and the system had to be discontinued. Science
Tech management was very dissatisfied and filed a lawsuit demanding return of the $10,000
consulting fee. The audit fee is normally about $50,000, and $10,000 is not an especially
large amount for your firm. However, you believe that Science Tech management operated
the system improperly. You are willing to do further consulting work at a reduced rate to
make the system operate, but you are unwilling to return the entire $10,000 fee.
f. A group of dissident shareholders filed a class-action lawsuit against both you and your
client, Amalgamated Inc., for $30 million. They allege there was a conspiracy to present
misleading financial statements in connection with a recent merger.
g. CPA Ellis Lisa, a shareholder in the firm of Eden, Benjamin, and Block, P.C. (a professional accounting corporation), owns 25 percent of the common stock of Dove Corporation
(not a client of Eden, Benjamin, and Block). This year, Dove purchased a 32 percent
interest in Tale Company and is accounting for the investment using the equity method of
accounting. The investment amounts to 11 percent of Dove’s consolidated net assets. Tale
Company has been an audit client of Eden, Benjamin, and Block for 12 years.
h. CPAs Mark and Ben Saliba are the father-and-son partners of Queens, LLP. They have
a 12 percent joint private investment in ownership of the voting common stock of Hydra
Corporation, which is not an audit client of Queens, LLP. However, the firm’s audit client,
Howard Company, owns 46 percent of Hydra, and this investment accounts for 20 percent
of Howard’s assets (using the equity method of accounting).
i. Drew Francie and Madison Brian, CPAs, regularly perform the audit of the First National
Bank, and the firm is preparing for the audit of the financial statements for the year ended
December 31, 2017.
(1) Two directors of the First National Bank became partners in Francie and Brian,
CPAs, on July 1, 2017, resigning their directorship on that date. They will not participate in the audit.
(2) During 2017, the former controller of the First National Bank, now a partner in Francie and Brian, was frequently called on for assistance regarding loan approvals and
the bank’s minimum checking account policy. In addition, the former controller conducted a computer feasibility study for First National
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