Question

The Fund of Funds (FoF) case involved an auditor (Arthur Anderson) of two companies, in which one of the companies (King) was defrauding the other (FoF). This had the effect that FoF was claiming a high value for a worthless asset, and as a consequence was reporting a material gain when it should record a loss instead.

What could Anderson have done to avoid the ethical dilemma it faced in the situation?

Select one:

a. Give an unqualified opinion to FoF to maintain confidentiality for the other client.

b. Resign from the FoF audit engagement while not explaining why.

c. Inform FoF of the fraud so it can reduce the asset value and publish correct financial statements.

Answer 1

Option C is correct

Arthur Anderson should have inform FoF of the fraud so it can reduce the asset value and publish correct financial statements.

Reason :-

• ​​Auditor can not give an unqualified opinion because auditors should have integrity amd truthfullness.
• Auditor is responsible to protect the users of financial statements if he is aware of the fraud, without explaining resigning from audit is not ethical and professional.