Question

2.64 Comprehensive Principles Case Study. Ray, the owner of a small entity, asked Holmes, CPA, to conduct an audit of the entity's records. 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 Page 70 agreed to pay Holmes a fixed fee plus a bonus if the loan was granted. Holmes hired two 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 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. Required: Briefly describe each of the principles and indicate how the action(s) of Holmes resulted in a failure to comply with these principles. (AICPA adapted)

Answer 1

The principles fall within three categories:

• Audit to be performed by individuals having adequate technical training and proficiency
• Auditors are to be independent
• Audit should be conducted with due professional care
• Fieldwork standard requires the following such as ;
• Audit is properly planned and supervised
• Develop an understanding of the client's control
• Obtain sufficient appropriate audit evidence
• Reporting Standard
• Final statement are fairly presented in accordance with GAAP or IFRS
• Identify circumstances in which accounting principles have not been consistent in current period in comparison with previous period
• Review disclosure for adequacy if not also state in the auditors report
• Express opinion on the financial statement as a whole or cannot express an opinion.

The action of Holmes resulted in failure to comply with standard in the following :

• Ho;mes being CPA was asked to conduct the audit but it was not sure that he have the adequate proficiency and training to do so
• Auditors need to be independent .However it is breached because Holmes agreed to undertake audit as it is required to submit as apart of loan application and also agreed to bonus to grant of loan.
• Holmes has hired two accounting students which questions the proficiency care.
• Audit was not done properly planned and supervised as many hours wasted in asking them what to do.
• Asking the accountants not to review control.
• Failure of presenting financial statements as per GAAP.
• Footnotes not provided since the company did not have unusual transactions breaching the requirement of disclosure even there is no unusual transactions.
• Accounting principles not consistent in comparison with current year and previous year is also not provided.
• Holmes breaches the auditors professional integrity and ethical values by expressing the opinion without reviewing controls with the intention to getting the bonus.