a.
Introduction: An organized and independent examination of financial services to express an opinion on financial statements whether such statements as a whole are free from material misstatement and giving a true and fair view of the state of the entity is known as auditing.
To explain: The objective of external auditing and failure of Person F to achieve the objective.
B.
Introduction: Auditor’s independence ensures that auditor conducts an audit in a fair manner and as per the established standards and rules without any bias or managerial influence that may affect the work performed.
To explain: The requirement of independent audit in financial statements.
C.
Introduction: The financial statements indicate the financial performance of a company. It discloses the
To state: The users of Company A’s financial statements and its adverse affect on Person F’s action.
D.
Introduction: Audit quality is maintained when audit is performed as per the generally accepted auditing standards and gives a reasonable declaration that the financial statements and related disclosures are free from material misstatements and are presented as per the generally acceptable accounting principles.
To state: The skill and knowledge required for quality audit of Company F’s financial statements and failure of individual who actually performed the audit work.
E.
Introduction: Audit quality is maintained when audit is performed in accordance with the generally accepted auditing standards and provides a reasonable assurance that the financial statements and related disclosures are free from material misstatements and are presented in accordance with generally acceptable accounting principles.
To explain: The facts in this case related to each of the driver of audit quality.
F.
Introduction: An organized and independent examination of financial services to express an on opinion on financial statements whether such statements as a whole are free from material misstatement and gives a true and fair view of the state of the entity is known as auditing.
To state: The Person F & B agreed to conduct the audit in first place.
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Chapter 1 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
- 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…arrow_forwardJ, B & J, Certified Public Accountants, has audited the Highcredit Corporation for the past five years. Recently, the Securities and Exchange Commission (SEC) has commenced an investigation of Highcredit for possible violations of Federal securities law. The SEC has subpoenaed all of J, B & J’s working papers pertinent to the audit of Highcredit. Highcredit insists that J, B & J not turn over the documents to the SEC. What action should J, B & J take? Why?arrow_forwardDuring the trial, Mary K. Cline, senior auditor for Deloitte, Haskins and Sells stated:“Well, we made a lot of judgments during the audit, and we were auditing the balance sheet asof May 31, and there was no reason in my judgment to look at this number after May 31.”6a. Should the oversale of lifetime partnerships be classified as a subsequent event?b. Should Deloitte have evaluated the sales occurring after the balance sheet date of May 31, 1984?c. Should L&H have been aware of the sales limits on lifetime memberships? If so, whatshould they have done about it?arrow_forward
- The Sarbanes-Oxley Act a. created the Private Company Accounting Board. b. allows accountants to audit and to perform any type of consulting work for a public company. c. stipulates that violators of the act may serve 20 years in prison for securities fraud. d. requires that an outside auditor must evaluate a public company’s internal controls.arrow_forwardIn 2010, P Corporation passed a board resolution removing X from his position as general manager of said corporation. The by-laws of P Corporation provides that the officers are the president, general-manager, treasurer and secretary. Upon complaint filed with the SEC, it held that the general manager could be removed by mere resolution of the Board of Directors. On motion for reconsideration, X alleged that he could only be removed by the affirmative vote of the stockholders representing 2/3 of the outstanding capital stock. Is X’s contention tenable? No, the voting requirement is only majority of the Board of Directors. No, the vote required is majority of the board and 2/3 of the outstanding capital stock consenting. Yes, the voting requirements is only 2/3 of the outstanding capital stock. No, the required vote is majority of the Board of Directors consented by majority of the outstanding capital stockarrow_forwardAn audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry: c. The lawyer stated that there is a reasonable possibility that the client will lose. The client disclosed this situation, but did not accrue a loss.arrow_forward
- Sawyer and Sawyer, CPAs, audited the financial statements of Rattler Corporation that were included in Rattler’s Form 10-K, which was filed with the SEC. Subsequently, Rattler Corporation went bankrupt and the stockholders of the corporation brought a class-action lawsuit against management, Sawyer and Sawyer, and the corporation’s board of directors and attorneys for misstatements of the financial statements. Assume that the jury in the case decides that responsibility for $5 million in losses should be allocated as follows: Management 70% Board of directors 20 Auditors 5 Attorneys 5 100% Under what securities act would the stockholders initiate this lawsuit? Assuming that all the defendants in the case are financially able to pay their share of the losses, calculate the amount of losses that would be allocated to Sawyer and Sawyer. Assuming that management had no financial resources, describe how Sawyer and Sawyer’s share of the losses might be increased.arrow_forwardThe Sarbanes-Oxley Act Created the Private Company Accounting Board. Allows accountants to audit and to perform any type of consulting work for a public company. Stipulates that violators of the act may serve 20 years in prison for securities fraud. Requires that an outside auditor must evaluate a public company’s internal controls.arrow_forwardNixon & Co., CPAs, issued an unmodified opinion on the 2015 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with the SEC. Nixon did not detect material misstatements in the financial statements as a result of negligence in the performance of the audit. Based upon the financial statements, Harry Corp. purchased stock in Madison. Shortly thereafter, Madison became insolvent, causing the price of the stock to decline drastically. Harry has commenced legal action against Nixon for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. What would be Nixon’s best defense to such an action? Explain.arrow_forward
- Mark Williams, CPA, was engaged by Jackson Financial Development Company to audit the financial statements of Apex Construction Company, a small closely held corporation. Williams was told when he was engaged that Jackson Financial needed reliable financial statements that would be used to determine whether to purchase a substantial amount of Apex Construction’s convertible debentures at the price asked by the estate of one of Apex’s former directors. Williams performed his audit in a negligent manner. As a result of his negligence, he failed to discover substantial defalcations by Carl Brown, the Apex controller. Jackson Financial purchased the debentures, but it would not have done so if the defalcations had been discovered. After discovery of the fraud, Jackson Financial promptly sold them for the highest price offered in the market at a $70,000 loss. If Apex Construction also sues Williams for negligence, what are the probable legal defenses Williams’s attorney would raise?…arrow_forwardMark Williams, CPA, was engaged by Jackson Financial Development Company to audit the financial statements of Apex Construction Company, a small closely held corporation. Williams was told when he was engaged that Jackson Financial needed reliable financial statements that would be used to determine whether to purchase a substantial amount of Apex Construction’s convertible debentures at the price asked by the estate of one of Apex’s former directors. Williams performed his audit in a negligent manner. As a result of his negligence, he failed to discover substantial defalcations by Carl Brown, the Apex controller. Jackson Financial purchased the debentures, but it would not have done so if the defalcations had been discovered. After discovery of the fraud, Jackson Financial promptly sold them for the highest price offered in the market at a $70,000 loss. Will the negligence of Mark Williams, CPA, prevent him from recovering on a liability insurance policy covering the practice of…arrow_forwardThe senior partner of Wojtysiak & Co., CPAs, has been approached by a small, publicly traded corporation wishing to change auditors. The Wojtysiak firm does not audit any other public companies. Because of the Sarbanes-Oxley Act of 2002, Mike Wojtysiak, the senior partner, needs to know the regulatory issues facing his firm if it accepts the new engagement.RequiredDraft a report that outlines the Sarbanes–Oxley considerations for a firm such as the Wojtysiak firm. Locate the actual act (Public Law 107-204) or perform a thorough summary and review it prior to preparing the report.arrow_forward
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