Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 17RQSC
To determine
Introduction: Unqualified opinion of an auditor means that the auditor has concluded that the financial statements of the company’s operations are fairly presented along with compliance of GAAP.
: The defense that the auditor may use against the investor’s lawsuit to recover losses.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
A group of investors sued Anderson, Olds, and Watershed, CPAs (AOW) for alleged damages suffered when the entity in which they held common stock went bankrupt. To avoidliability under the common law, AOW must demonstrate which of the following?a. The investors actually suffered a loss.b. The investors relied on the financial statements audited by AOW.c. The investors’ loss was a direct result of their reliance on the audited financial statements.d. The audit was conducted in accordance with generally accepted auditing standards andwith due professional care.
Nixon & 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.
A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense?
A) The investor has not proven CPA negligence.
B) The CPA detected the misstatement after the audit report date.
C) The audit work was adequate to support the CPA's opinion.
D) The investor did not rely upon the financial statement.
Chapter 4 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
Ch. 4 - Prob. 1CYBKCh. 4 - Prob. 2CYBKCh. 4 - Prob. 3CYBKCh. 4 - Prob. 4CYBKCh. 4 - Prob. 5CYBKCh. 4 - Prob. 6CYBKCh. 4 - Prob. 7CYBKCh. 4 - Prob. 8CYBKCh. 4 - Prob. 9CYBKCh. 4 - Prob. 10CYBK
Ch. 4 - Prob. 11CYBKCh. 4 - Prob. 12CYBKCh. 4 - Prob. 1RQSCCh. 4 - Prob. 2RQSCCh. 4 - Prob. 3RQSCCh. 4 - Prob. 4RQSCCh. 4 - Prob. 5RQSCCh. 4 - Prob. 6RQSCCh. 4 - Refer to the Focus on Fraud feature “Moss Adams...Ch. 4 - Prob. 8RQSCCh. 4 - Prob. 9RQSCCh. 4 - Prob. 10RQSCCh. 4 - Prob. 11RQSCCh. 4 - Prob. 12RQSCCh. 4 - Prob. 13RQSCCh. 4 - Prob. 14RQSCCh. 4 - Prob. 15RQSCCh. 4 - Prob. 16RQSCCh. 4 - Prob. 17RQSCCh. 4 - Prob. 18RQSCCh. 4 - Prob. 19RQSCCh. 4 - Prob. 20RQSCCh. 4 - Prob. 21RQSCCh. 4 - Able Corporation decided to make a public offering...Ch. 4 - KPMG (LO 1, 2, 3) KPMG LLP served as the external...Ch. 4 - ToshIba, EY (LO 1, 2, 3) In 2015, the business...
Knowledge Booster
Similar questions
- 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_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. What liability does Williams have to Jackson Financial? Explainarrow_forward
- A company Hira Ltd. has been mis-reporting its financial statements since more than 10 years which none of the stakeholders noticed for years. When the situation of the Company went from bad to worse and it had no option but to declare it bankrupt, the company issued a press statement that there is disparity between actual and reported results due to accounting errors. The first question from shareholders of the Company was why the auditors had not spotted and corrected the fundamental accounting errors? The auditor of the Company, WCP partnership (one of the largest audit firm in the country), had compromised its independence by a large audit fee and also consultancy income worth several times the audit fee. Because Hira Ltd. was such an important client for WCP, it had knowingly signed off inaccurate accounts in order to protect the management of the Company. The investigation also found a number of significant internal control deficiencies including no effective management oversight…arrow_forwardAs the auditor for Company A, you discover that a material sale ($500,000 sale; cost of goods of $300,000) was made to a customer this year. Because of poor internal accounting controls, the sale was never recorded. Your client makes a management decision not to bill the customer because such a long time has passed since the shipment was made. You determine, to the best of your ability, that the sale was not fraudulent. Using the framework for ethical decision making, determine whether the auditor should require either a recording or a disclosure of the sales transaction. Instructions: Using the framework for ethical decision making, determine whether the auditor should require either a recording or a disclosure of the sales transaction. Please make sure to use at least 100 words in your response. Once you give your response, please respond to at least two of your peers using at least 50 words in your responses. Remember to follow the netiquette guidelines found in the course…arrow_forwardAn accountant is hired by a company to do an audit on their financial statements. The accountant does everything she is asked. 16 days after the audit, the CFO is arrested for embezzlement. The stockholders sue the accountant, suggesting that she should have discovered the embezzlement during the audit. Should the court find that the accountant is negligent? Group of answer choices A. Yes, because an accountant is hired to determine if there is embezzlement B. Yes, but only if it is shown than an ordinary accountant would have also uncovered the embezzlement C. No, because the accountant was hired by the CFO, so therefore it would have been a conflict of interest D. Yes, because the accountant was hired by the CFO, therefore it is likely the accountant is also guiltyarrow_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_forwardMajor, Major & Sharpe, CPAs, are the auditors of MacLain Technologies. In connectionwith the public offering of $10 million of MacLain securities, Major expressed anunqualified opinion as to the financial statements. Subsequent to the offering, certainmisstatements were revealed. Major has been sued by the purchasers of the stockoffered pursuant to the registration statement that included the financial statementsaudited by Major. In the ensuing lawsuit by the MacLain investors, Major will be ableto avoid liability if(1) the misstatements were caused primarily by MacLain.(2) it can be shown that at least some of the investors did not actually read theaudited financial statements.(3) it can prove due diligence in the audit of the financial statements of MacLain.(4) MacLain had expressly assumed any liability in connection with the public offering.arrow_forwardWilhelm Company prepares its financial statements according to International Accounting Standards (IFRS). It recently estimated that it has a 55 percent chance of losing a lawsuit. Assuming Wilhelm can reliably estimate the amount it would pay if it loses the lawsuit, it should. a. Accrue a liability for the lawsuit. b. Disclose the matter in the notes to the financial statements but not accrue a liability for the lawsuit. c. Make no mention of the lawsuit in the financial statements or notes. d. None of the above.arrow_forward
- Management informed the auditor that they erroneously charged the acquisition of SMC shares to the account “Marketable Securities” when they never had any intention to dispose of this when in need of cash. These shares should be treated as securities @ FVOCI – noncurrent. The company recorded a 20,000 decline in market value of these shares and charged this to operating expenses. Requirement: Prepare adjusting entriesarrow_forwarde. Of the following, the most significant risk factor relating to the risk of misstatement arising from fraudulent financial reporting for SSC is that: Multiple Choice Company officers serve on the board of directors. The company must refinance a significant portion of its debt. The company operates in the Bisbee, Arizona, area. The company paid no dividend this year. Untitled docume...pdf Untitled docume....pdf docx Presentation se....pdf Untitled docume...pdf 身arrow_forwardWhen investors sue auditors for damages under section 11 of the Securities Act of 1933,they must allege and provea. Scienter on the part of auditors.b. The audited financial statements contained a material misstatement.c. They relied on the materially misstated financial statements.d. Their reliance on the materially misstated financial statements was the direct cause oftheir loss.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Auditing: A Risk Based-Approach (MindTap Course L...
Accounting
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Cengage Learning