Eliot Rey, the owner of a publicly held technology company, asked Mary Messup, C

Question

Eliot Rey, the owner of a publicly held technology company, asked Mary Messup, CPA, to conduct an audit of the company's records. The financial statements to be audited covered a two-year period. The statements needed to be ready to submit to the SEC by September 30, 2017. Rey also needed to provide the audited financial statements to their bank as part of a large loan application. Messup immediately accepted the engagement and agreed to provide an auditor's report within one month. Rey agreed to pay Messup her normal audit fee plus a percentage of the loan if it was approved Messup hired two Sac State accounting graduates (both graduated in May 2017) to conduct the audit. She spent several hours going over what they needed to do. She told the new hires not to spend any time reviewing the client's system of internal control but to concentrate on checking the mathematical accuracy of the general ledger and summarizing the data in the accounting records that supported Rey's financial statements. The new hires followed Messup' instructions. They competed the audit procedures in two days. They did notice that the company failed to include the terms of a large note payable in the footnotes, but they were nervous about talking to Mr. Rey about that. They did talk to Mr. Rey about the fact that although 25% of the accounts receivable were over 120 days old there was no allowance for doubtful accounts included. Mr. Rey said they shouldn't be concerned about that. They made a note of his response in the workpapers. They turned over the workpapers to Messup along with the financial statements prepared by the client. Messup gave an unmodified (clean) opinion on the financials. REQUIRED: For each of the auditing principles listed, identify the action(s) taken (or not taken) by Messup or her assistants that support(s) their compliance with the requirement.

Explanation / Answer

6. The importance of the auditor's risk assessment as a backbone of conducting audit procedures is discussed here in AS 1101 Audit Risk and AS 2105 Consideration of Materiality in Planning and Performing an Audit and AS 2201 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. See AS 1105 Audit Evidence, for guidance on how the auditors uses relevant and sufficient detail to form a basis for the assessment of risks of material misstatement and to design and perform further audit procedures. Risk assessments at the financial statement must be checked by auditors and based on an appropriate understanding of the entity and its environment, including its internal control. AS 2301, The Auditor’s responses to the Risks of Material Mismanagement and AS 2810 Evaluating Audit Results, tells us about the auditor's responsibility to determine overall audit responses and to plan and perform other audit procedures whose nature, timing, and extent are responsive to the risk assessments. This AS should be applied in conjunction with the standards and guidance provided in other AS. In particular, the auditor's responsibility to consider fraud in an audit of financial statements is discussed in AS 2401: Consideration of Fraud in a Financial Statement Audit.

Here Mr Eliot Rey, owner of publicly held technology company needs to get his company’s accounts audited by Auditors and Messup accepted the audit and agreed to conduct the audit of Mr. eliot’s company. AS 1220: Engagement Quality Review and AS 1005: Independence, In consideration a percentage of loan cannot be taken by the auditors Messup. As per AS 2201 An Audit of Internal Control Over Financial Reporting, reviewing the client’s internal control system is important and not only checking the mathematical accuracy of data and ledgers. As per AS 1305: Communications About Control Deficiencies in an Audit of Financial Statements foot note about payable must be mentioned in notes to financial statement and proper provisions must be created for accounts receivable. Audit is independent opinion over the financial statements prepared by company and the auditor must make her independent opinion. As per AS 3101: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, clean report cannot be given here in this case.

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