Charles Worthington, the founding and senior partner of a successful and respected public accounting firm, was a highly competent practitioner who always emphasized high professional standards. One of the policies of the firm was that all reports by members or staff be submitted to Worthington for review.
Recently, Robert Craft, a junior partner in the firm, received a phone call from Herbert Flack, a close personal friend. Flack informed Craft that he, his family, and some friends were planning to create a corporation to engage in various land development ventures; that various members of the family are presently in a
Flack asked Craft to prepare a balance sheet of the partnership that he could show to members of his family, who were in the partnership, and to friends, to determine whether they might have an interest in joining in the formation and financing of the new corporation. Flack said he had the partnership general ledger in front of him and proceeded to read to Craft the names of the accounts and their balances at the end of the latest month. Craft took the notes he made during the telephone conversation with Flack, classified and organized the data into a conventional balance sheet, and had his secretary type the balance sheet and an accompanying letter on firm stationery. He did not consult Worthington on this matter or submit this work to him for review.
The transmittal letter stated: “We have reviewed the books and records of Flack Ventures, a partnership, and have prepared the attached balance sheet at March 31, 20X0. We did not perform an audit in conformity with generally accepted auditing standards, and therefore do not express an opinion on the accompanying balance sheet.” The balance sheet was prominently marked “unaudited.” Craft signed the letter and instructed his secretary to send it to Flack.
Required:
What legal problems are suggested by these facts? Explain.
Want to see the full answer?
Check out a sample textbook solutionChapter 4 Solutions
Principles Of Auditing & Other Assurance Services
- Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit and he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation needed the audit to obtain a substantial amount of additional financing to acquire another company. Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the engagement should be substantial. Because Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that Tower & Tower wanted to do the work. Potter then mentioned that Tower & Tower’s quality control policies require an investigation of new clients and approval…arrow_forwardTammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit and he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation needed the audit to obtain a substantial amount of additional financing to acquire another company. Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the engagement should be substantial. Because Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that Tower & Tower wanted to do the work. Potter then mentioned that Tower & Tower’s quality control policies require an investigation of new clients and approval…arrow_forwardJohn Ozment, director of special projects and analysis for Ozment’s Corporation, is responsible for preparing corporate financial analyses and monthly statements and reviewing and presenting the financial impacts of proposed strategies to upper management. Data for such financial analyses are obtained from operations and financial databases through direct queries of Ozment’s department staff. Reports and charts for presentations are then prepared by hand and typed. Multiple copies are prepared and distributed to various users. The pressure on Ozment’s group has intensified as demand for more and more current information increases. A solution to this reporting problem must be found.The systems department wants to develop a proprietary software package to produce the reports automatically. The project would require the company to make a considerable programming investment. Ozment is concerned about the accuracy, completeness, and currency of data in automatically produced reports. He has…arrow_forward
- You are a CPA and you are the CFO (Chief Financial Officer) of USB Computer Technologies Inc., a company that specializes in customized business software. You have been requested by the board of directors of the company to attend its meeting. During the meeting, one of the directors asked you, "Why audits of our company performed by different auditors (internal, external, government). Before you could answer question, another direfctor mentioned "it would be more cost-efficient if our internal auditors will performed all the audits. " Requirements. Write down your reply to each question of the members of the board of directors. In relation to your answer in number 1, identify the issues that must be explained to the Board.arrow_forwardJohn Ozment, director of special projects and analysis for Ozment’s Corporation, is responsible for preparing corporate financial analyses and monthly statements and reviewing and presenting the financial impacts of proposed strategies to upper management. Data for such financial analyses are obtained from operations and financial databases through direct queries of Ozment’s department staff. Reports and charts for presentations are then prepared by hand and typed. Multiple copies are prepared and distributed to various users. The pressure on Ozment’s group has intensified as demand for more and more current information increases. A solution to this reporting problem must be found. The systems department wants to develop a proprietary software package to produce the reports automatically. The project would require the company to make a considerable programming investment. Ozment is concerned about the accuracy, completeness, and currency of data in automatically…arrow_forwardDave Czarnecki is the managing partner of Czarnecki andHogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he issurprised when his friend James Foley asks him, “Doesn’t it bother you that your clientsdon’t look forward to seeing their auditors each year?” Dave responded, “Well, auditingis only one of several services we provide. Most of our work for clients does not involvefinancial statement audits, and our audit clients seem to like interacting with us.”a. Identify ways in which a financial statement audit adds value for clients.b. List other services other than audits that Czarnecki and Hogan likely provides.c. Assume Czarnecki and Hogan has hired you as a consultant to identify ways inwhich they can expand their practice. Identify at least one additional service that youbelieve the firm should provide and explain why you believe this represents a growthopportunity for CPA firms.arrow_forward
- Dave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend Juarez Foley asks him, “Doesn’t it bother you that your clients don’t look forward to seeing their auditors each year?” Dave responds, “Well, auditing is only one of several services we provide. Most of our work for clients does not involve financial statement audits, and our audit clients seem to like interacting with us.” Identify ways in which a financial statement audit adds value for clients. List services other than audits that Czarnecki and Hogan likely provides. Assume Czarnecki and Hogan has hired you as a consultant to identify ways in which they can expand their practice. Identify at least one additional service that you believe the firm should provide and explain why you believe this represents a growth opportunity for CPA firms.arrow_forward21. Imagine you are an audit manager for KPAG and partners – an audit firm based in Muscat. You have just been asked by one of your existing clients, SOHAR corporation, for help in compliance with corporate governance guidelines because they are about to obtain a stock exchange listing. They have sent you the following information. At present Mr. Omar al Balushi is both Chairman and CEO (Chief Executive Officer) of SOHAR corporation. You are required to identify from the following, whether it is a corporate governance weakness or strength and choose the correct recommendations. a. Yes, it is a weakness and chairman and CEO should not be Mr. Omar al Balushi b. Yes, it is a weakness, however if external auditors agree Mr. Omar al Balushi can continue c. None of the options d. No, it is not a weakness so no recommendation requiredarrow_forwardYou are an audit supervisor assigned to a new client which is listed on a Stock Exchange. You visited the corporate headquarters to become acquainted with key personnel and to conduct a preliminary review of the company’s accounting policies, controls, and systems. During this visit, (b) You recognized the treasurer who was convicted of fraud several years ago. Identify the problems and explain them in relation to the internal environment.arrow_forward
- XYZ Company is an electronic company. Its board members are independent directors. The company receives auditing and tax consultancy services from MNO Company. Also, XYZ hired former MNO partners as senior financial executives. 1) What is your opinion about the above case? 2) What recommendation(s) would you give to the board of directors? Explain your answer.arrow_forwardYou are a recently appointed audit partner in a large independent firm of CPAs. You are delighted that you are now a partner and can’t wait to sign off your first set of accounts. Your firm recently won an audit tender for a medium-sized family owned company, Alert Ltd, and the firm’s managing partner has allocated the client to you. The managing partner is reasonably close to the family which owns Alert Ltd and you believe that this is at least part of the reason why the company decided to appoint your firm. As is normal, you go through all the firm’s new client procedures which include writing to the previous auditors and also obtaining sets of statutory accounts for the previous 3 years. When you receive the written reply from the previous auditors, you note that they have nothing to report other than any matters addressed in their audit report. This seems strange, so you quickly review the company’s set of financial statements for the previous year and note that the company’s audit…arrow_forwardThe accounting firm involved in this case wants to know if their independence will be questioned by the BOA. You have been asked to submit an analysis and conclusion. 2. Franklin Rosario is an audit manager in the Salvador & Santos accounting firm. He has just been assigned to the audit of the Starex Money Market Fund. Franklin has maintained a money market account with SMMF since it opened in 2008. All his savings, amounting to 75 percent of his total assets, are in this account, which pays the highest interest available in money market funds. However, his account constitutes only .00001 percent of the fund's assets.arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education