Question

Deanza, CPA, accepted an engagement to audit the financial statements of Foothill Co., a new client. Foothill is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Deanza discovered that Foothill's financial statements may be materially misstated due to the existence of fraud.

Required:

(a.) Describe Deanza's responsibilities on the circumstances described above.

(b.) Describe Deanza's responsibilities for reporting on General's financial statements and other communications if Deanza is precluded from applying necessary procedures in searching for frauds.

(c.) Describe Deanza's responsibilities for reporting on General's financial statements and other communications if Deanza concludes that General's financial statements are materially affected by frauds

Answer 1

Answer:

(a). If Deanza's discovers that foothills financial statements May be materially misstated due to the existence of frauds, Deanza should consider the implementations for other aspects of the audit and discuss the matter and approach to further investigation with an appropriate level of management that is at least one level above those involved with the frauds.Deanza should also attempt to obtain sufficient competent evidential matter to determine whether,in fact, material frauds exist and,if so their effect. Deanza may suggest that foothills consult with its legal counsel on matters concerning questions of law.

(b). If Deanza is precluded from applying necessary procedures, Deanza should disclaim or qualify an opinion on the financial statements and communicate these findings to foothills audit committee or its board of directors.

(c). If Deanza concludes that foothills financial statements are materially affected by frauds,Deanza should insist that the financial statements be revised and,if they are not, express a qualified or an adverse opinion on the financial statements, disclosing all the substantive reasons for such an opinion. Additionally, post should adequately inform foothills audit committee or its board of directors about the frauds.