John Clinton, owner of Clinton Company, applied for a bank loan and was informed

Question

                John Clinton, owner of Clinton Company, applied for a bank loan and was informed by the banker that audited financial statements of the business h ad to be submitted before the bank could consider the loan application. Clinton then retained Arthur Jones, CPA, to perform an audit. Clinton informed Jones that audited financial statements were required by the bank and that the audit must be completed within three weeks. Clinton also promised to pay Jones a fixed fee plus a bonus if the bank approved the loan. Jones agreed and accepted the engagement.                        

                The first step taken by Jones was to hire two accounting students to conduct the audit. He spend several hours telling them exactly what to do. Jones told the students not to spend time reviewing controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Clinton  Company's financial statements. The students followed Jones's instructions and after two weeks gave Jones the financial statements, which did not include any notes. Jones reviewed the statements and prepared an unqualified audit report. The report, however, did not refer to generally accepted accounting principles.

                List on the left side the generally accepted auditing standards that were violated by Jones, and indicate how the actions of Jones resulted in a failure to comply with each standard.

Generally   Accepted Auditing Standards

Actions   by Jones Resulting in Failure to Comply with Generally Accepted Auditing   Standards

General Standards

(1) The auditor must have adequate technical training and proficiency   to perform the audit.

It was inappropriate for Jones 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.  Although a junior assistant has not   completed his formal education, he or she may help in the conduct of the   audit as long as there is proper supervision and review.

(2)

(3)

Standards of Field Work

(1)

(2)

(3)

Standard of Reporting

(1)

(2)

(3)

(4)

  

Generally   Accepted Auditing Standards

     

Actions   by Jones Resulting in Failure to Comply with Generally Accepted Auditing   Standards

     

General Standards

     

     

(1) The auditor must have adequate technical training and proficiency   to perform the audit.

     

It was inappropriate for Jones 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.  Although a junior assistant has not   completed his formal education, he or she may help in the conduct of the   audit as long as there is proper supervision and review.

     

(2)

     

     

(3)

     

     

Standards of Field Work

     

     

(1)

     

     

(2)

     

     

(3)

     

     

Standard of Reporting

     

     

(1)

     

     

(2)

     

     

(3)

     

     

(4)

     

  

Explanation / Answer

General standards

2)   The auditor must maintain independence in mental attitude in all matters related to the audit.

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