Question

Dale Boucher, the owner of a small electronics firm, asked Sally Jones, CPA, to con- duct an audit of the company’s records. Boucher told Jones that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Jones immediately accepted the engagement and agreed to provide an auditor’s report within one month. Boucher agreed to pay Jones her normal audit fee plus a percentage of the loan if it was granted. Jones hired two recent accounting graduates to conduct the audit and spent sev- eral hours telling them exactly what to do. She told the new hires not to spend time reviewing the entity’s system of internal control but to concentrate on proving the mathematical accuracy of the general and subsidiary ledgers and summarizing the data in the accounting records that supported Boucher’s financial statements. The new hires followed Jones’s instructions and after two weeks gave Jones the financial statements excluding footnotes. Jones reviewed the statements and pre- pared an unqualified auditor’s report. The report did not refer to generally accepted accounting principles, and no audit procedures were conducted to verify the year- to-year application of such principles.

Briefly describe the four categories of Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards and indicate in what ways the action(s) of Jones violate(s) each of the four categories of principles.
(AICPA, adapted)

Answer 1

Dale Boucher Sally Jones' Actions Resulting in Failure to Comply with Principles Underlying an Audit Brief Description of Principles Underlying an Audit Purpose and Premise of an Audit: An audit is to offer an opinion by an auditor on whether financial statements are presented fairly, in all material respects, according to the relevant framework. Management and those charged with governance are accountable for the preparation and fair presentation of the financial statements and for the design, implementation, and maintenance of internal control over financial reporting. They are also responsible for providing the auditor with all information appropriate to the preparation of the financial statements. Jones expressed an opinion regarding the financial statements, but not on whether the financial statements are presented fairly in accordance with generally accepted accounting principles, or any other financial reporting framework. Therefore, she did not fulfill the primary purpose of the audit. Jones did not ensure that management fulfilled its responsibilities for the fair presentation of the financial statements, since that requires making the appropriate disclosures in the financial statements. Responsibilities: Auditors are accountable for having appropriate competence and proficiencies to perform the audit; complying with applicable ethical requirements; and maintaining professional skepticism and exercising professional judgment, throughout the planning and performance of the audit. It was incorrect for Jones to hire the two students to conduct the audit, because they do not have suitable competence and capabilities. In order to comply with ethical requirements, Jones must be without prejudice with respect to the client under audit. Because of the financial interest in whether the bank loan is granted to Boucher, Jones is not independent in either fact or appearance with respect to the assignment undertaken. Neither Jones nor her two assistants exercised professional skepticism or professional judgment in performing the audit. Performance: The auditor must obtain judicious assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. To do so, the auditor must plan the work and supervise any assistants; determine an appropriate materiality level; identify and assess risks of material misstatement based on an understanding of the entity and its environment, including its internal control; and obtain sufficient appropriate audit evidence about whether misstatements exist. The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatements. Jones failed to supervise the assistants. The work performed was not adequately planned. Jones did not study the client or its environment, including internal control, nor did the assistants. Consequently, she could not have identified risks of material misstatements. Jones acquired little evidence that would support the fairness of the financial statements. Jones merely checked the mathematical accuracy of the records and summarized the accounts. Several standard audit procedures and techniques were neglected. Reporting: Based on an assessment of the audit evidence obtained, the auditor expresses an opinion in accordance with the auditor's findings, or states that an opinion cannot be expressed. The opinion states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. Although Jones' report contains an expression of opinion, her opinion is not based on the results of a proper audit examination. Jones should disclaim an opinion because she failed to conduct an examination in accordance with generally accepted auditing standards. Jones' opinion made no reference to the applicable financial reporting framework. Also, since the financial statements did not contain adequate disclosures, they could not have been in accordance with any financial reporting framework.