Question

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.

Requirement:

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 using the principles listed on the next page..

Answer 1

Answer:-

1)

BRIEF DESCRIPTION OF PRINCIPLE
Responsibilities Principles

The auditor must possess the competency and capabilities to perform the audit.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

It was inappropriate for Holmes to hire the two students to conduct the audit. The audit must be conducted by persons with proper education and experience in the field of auditing.

2) BRIEF DESCRIPTION OF PRINCIPLE
Responsibilities Principles

The auditor must comply with ethical requirements, which include maintaining independence in mental attitude in all matters relating to the audit.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

To satisfy this principle, Holmes must be without bias with respect to the client under audit. Holmes has an obligation for fairness to the owners, management, and creditors who may rely on the report. Because of the financial interest in whether the bank loan is granted to Ray, Holmes is independent in neither fact nor appearance with respect to the assignment undertaken.

3)

BRIEF DESCRIPTION OF PRINCIPLE
Responsibilities Principles

The auditor must maintain professional skepticism and exercise professional judgment in the performance of the audit and the preparation of the report.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

Maintaining professional skepticism and exercising professional judgment require critical review at every level of supervision of the work done and the judgments exercised by those assisting in the audit. Holmes did not review the work or the judgments of the assistants and clearly failed to adhere to this standard.

4) BRIEF DESCRIPTION OF PRINCIPLE
Responsibilities Principles

The auditor must adequately plan the work and must properly supervise any assistants.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

Holmes accepted the engagement without considering the availability of competent staff. In addition, Holmes failed to supervise the assistants. The work performed was not adequately planned.

5)

BRIEF DESCRIPTION OF PRINCIPLE
Responsibilities Principles

The auditor must identify and assess the risks of material misstatement based on a sufficient understanding of the entity and its environment, including its internal control, to design the nature, timing, and extent of further audit procedures.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

Holmes did not obtain an understanding of the entity or its internal control, nor did the assistants obtain such an understanding. There appears to have been no audit at all.

6)

BRIEF DESCRIPTION OF PRINCIPLE
Responsibilities Principles

The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

Holmes acquired no evidence that would support the financial statements. Holmes merely checked the mathematical accuracy of the records and summarized the accounts. Standard audit procedures and techniques were not performed.

7)

BRIEF DESCRIPTION OF PRINCIPLE
Reporting Principles

The auditor must assess whether the financial statements are presented in accordance with the financial reporting framework.

HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE

Holmes' improper audit would not enable him to determine whether generally accepted accounting principles were consistently applied.

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 generally accepted accounting principles.