Question

be used for reporting by the parent company ill a s 2-20 (OBJECTIVE 2-7) Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company's records. Ray told Holmes that an 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 auditor's report within three weeks. Ray 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 internal controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that supported Ray's financial statements. The students followed Holmes's instructions and after two weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unmodified auditor's report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles. Briefly describe each of the principles underlying AICPA auditing standards and indicate how the action(s) of Holmes resulted in a failure to comply with each principle. Organize your answer as follows:* Holmes' Actions Resulting in Failure to Brief Description of Principle Comply with the Principle Require

Answer 1

Refer the below images for the above asked case , in a detailed way of explanation.
Answer: Brief Description of GAAS Holme's Failure Actions Resulting to comply with in GAAS 1. General standards : The auditor must have adequate technical training and proficiency to perform the audit. to it was inappropriate for Holmes to hire the two students to conduct the audit The autit most be condocted by persons with proper education & experience in the field of auditing. Although a junior assistant has not Completed his formal education, he may help in the conduct of Audit as long as there is proper Supervision and review. 2. The auditor most maintain independence in mental attitude in all matters relating to the audit 3. The auditor most exercise due professional care in the performance of the audit and the preparation of the report 2. To satisfy the second general Standard Holmes must be without bias with respect to the client under audit. Holmer has an obligation for fairness to the owners, manageme't & creditors who may rely on the report Because of the financial intereit in whether the bank loan is granted to Ray Holmes is independent in neither fact hor appearance with respect to the assignment ondertaken. this standard require Holmes to perform the audit with due care, which imposes on solmes and everyone in Hames organisation a responsibility to observe the Standards of field work and reporting Exercise of due care requires critical review at every level of fupervision of the work done and the judgments exercised by those assisting in the audit. Holmes did not review the work corg the judgements of the assistants and clearly failed to adhere to this standard.

Brief description of GAAS in failure Holmes Actions resulting to comply with GAAS General Standards & 1. The auditor most adequately plan the work and most properly supervise any assistants 1. This standard recognizes that early appointment of the auditor has advantages for the auditor and the client Holmes accepted the engagement without considering the availability of competent staff. In addition, Holmes failed to Supervise the assistants the work performed was not adequatly planned 2. The auditor most obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of materiall müsstatement of the financal statements whether due to error cors fraud, and to design the nature, timing & extent of forther audir procedures. 2. Holmes did not obtain an understanding of the entity Cory its internal control, nor did the assistants obtain Coch as onderstanding. There appears to have been no audit at all. The work performed was more an accounting Service than it was an auditing Service. 3. The auditor most obtain sufficient & appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial Statements under 3. Holmes acquired no evidence that would Support the financial Statements a stones merely checked the mathematical accuracy of the records & Summarized the accounts. Standard audit procedures & techniques were not performed. audit.

Standards of Reporting: 1. The auditor must state in the auditor's report whether the finanual Statements are Presented in accordance with generally a capted accounting prinuples (Gnap). T. Holmes report made no reference to generally accepted accounting principles. Because Holmes did not conduct a proper audit, the report should state that no opinion can be expressed as to the fair presentation of the financial Statements in accordance with GAAP. 2. Holmes improper audit enable him to determine GAAP were consistently would not whether applied. 2. The auditor most identify in the auditors report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period Holmes to the accounting report Should make no reference consistent application of prinoples. 3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor most so State in the auditor's report. 4. The auditor most either express an opinion regarding the financial Statements, taken as a whole , cor) state that on opinion cannot be expressed in auditory report when the auditor connot express an overall opinion, the auditor! should state the reasons there for in the auditors report In all cases where an auditoris name is associated with financial Statements, the auditor Should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking in the auditor's report. 3. Management is primarily responsible for adequate disclosures in the financial Statements, but when the Statements do not contain adequate disdesores the auditor should make roch disclosoves in the auditor's report. In this Ease both the statements is the auditor's report lack adequate disclosures. 4 Although the Holmes report contains an expression of opinion, Cock opinion is not based on the results of a proper audit Holmes should disclaim an opinion because he failed to conduct an audit in accordance with generally accepted auditing Standards.