Question

Ray, the owner of a small entity, asked Holmes, CPA, to conduct an audit for the entity's record. Ray told Holmes that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditors' report within three weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.

Holmes hired to accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students, not to spend time reviewing the to concentrate on proving controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and on summarizing the data in the accounting records that support Ray's financial statements, the students followed Holmes' instructions and, after two weeks, gave Holmes the financial statements, which did not include footnotes. Holmes studied the statements and prepared an unmodified auditors' report. The report, however, did not refer to generally accepted accounting principles or to the fact that Ray had changed to the accounting standard for capitalizing interest.

Requirement: use two columns with the first column showing the standards and the second column indicating if the standard has been violated.

Answer 1

As per the above discussion, ray asked holes to conduct an audit and to submit audited financial statements to a bank as a part of laoan application. However, Holmes prepared an unmodified audit report and the report did not refer to Generally accepted accounting principles which is wrong and he had changed to the accounting standard for capitalizing interest which is in turn violating the accounting standards.

audit Auditing Standard Violation Section 101- Respnsibilities and functions of the Independent auditor Responsibilty of auditor- As per the standard auditor has to plan and Audit has been performed by the accounting students and perform the audit to provide a reasonable assurance whether accounting judgements were not reviewd by the auditor financial statements are free of material misstatement, whether The work performed was not adequetly performed by the caused by error or fraud. students Professional Qulaification:As per the standard audit has to be Audit of the entity is conducted by the students who do not conducted by the auditor who possess competency,capability, possess relevant competency and experience to perform the education and experience to perform the audit Section 230- Due professional care in performance of the work Professional Skepticism: As per the standard auditor must exercise Auditor did not review the work or the students judgements due professional care and should mainytain professional skepticism. and the concept of professional skepticism is lost Section 410-Adherence to Generally accepted accounting principles According to this section, auditor must state in the auditor's report whether the financial statements are presented in accordance with In this case auditor did not refer to the Generally accepted generally accepted accounting principles. accounting principles in the report Section 420-Consistentcy of application of Generally Accepted accounting principles The auditor has changed the accounting standard for This standard require auditor to express whether the accounting capitalizig the interest where the standard is not consistently principles are consistently applied or not applied