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.

Statndards of reporting #4:

The report on an engagement to evaluate subject matter that has been prepared based on agreed-upom criteria or an assertion related thereto, or on and engagement to apply agreed-upon procedures, should contain a statement restricting its use to the parties who have agreed upon such criteria or procedures.

Actions by Jones Resulting in Failure to Comply with Generally Accepted Auditing Standards based on the above paragraph!

Please help! Thanks!!

Explanation / Answer

general Standards:

It was inappropriate for Jones to hire the two students to conduct the audit. The examination 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 may help in the conduct of the examination as long as there is proper supervision and review

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To satisfy the second general standard, Jones must be without bias with respect to the client under audit. Jones 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 Boucher, Jones is not independent in either fact or appearance with respect to the assignment undertaken.

===========================================================This standard requires Jones to plan and perform the audit with due care, which imposes on Jones and everyone in Jones's organization a responsibility to observe the standards of fieldwork and reporting.

Exercise of due care requires critical review at every level of supervision of the work done and the judgments exercised by those assisting in the examination. Jones did not review the work or the judgments of the assistants and clearly failed to adhere to this standard.

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Fieldwork:

This standard recognizes that early appointment of the auditor has advantages for the auditor and the client. Jones accepted the engagement without considering the availability of competent staff. In addition, Jones failed to supervise the assistants. The work performed was not adequately planned

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Jones did not study the client or its environment, including internal control, nor did the assistants. There appears to have been no audit examination at all. The work performed was more an accounting service than it was an auditing service.

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Jones acquired little evidence that would support the fairness of the financial statements. Jones merely checked the mathematical accuracy of the records and summarized the accounts. Several standard audit procedures and techniques were neglected.

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Standards of Reporting:

Jones's report made no reference to generally accepted accounting principles. Because Jones did not conduct a proper examination, the report should state that no opinion can be expressed as to the fair presentation of the financial statements in accordance with GAAP.

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Management is responsible for adequate disclosure in the financial statements, but when the statements do not contain adequate disclosures the auditor should make such disclosures in the auditor's report. Both the statements and the auditor's report lack adequate disclosures

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Jones's improper examination would not enable her to determine whether accounting principles have been consistently applied.

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