Yu, as CPA at Yore Company, CPAs, fell into conversation with Hymn, a friend, at
ID: 2424163 • Letter: Y
Question
Yu, as CPA at Yore Company, CPAs, fell into conversation with Hymn, a friend, at a Rotary Club meeting. Hymn noted that her firm was in need of a new auditor. Yu told her that his firm might be able to do it, but that they would have to do some preliminary work before they decided. "As long as you don't talk to last year's auditor. He was a real Jerk." "That shouldn't be a problem," Yu said. Hymn’s company was not in an industry that Yu was familiar with, but Yu assured Hymn that if they ran into anything new during the audit, they would almost certainly be able to figure it out. Hymn informed Yu that their long-time accountant had retired and the new one was not quite up to snuff yet. She wasn’t sure that the new accountant would be able to produce proper financial statements. Yu assured him that he would be able to help get them in shape before the audit began. Hymn, seemed pleased by the arrangement. “It will be nice to have someone do the audit that already knows me. It is easier working from a relationship of trust.” At that, Yu gave her a high-five, "It's easier to do the audit as well." Hymn informed Yu that inventory has already been counted. “Will that be a problem?” “It may be,” Yu said. “If we can’t get the information we need we may need to issue a qualification for a departure from generally accepted accounting principles, but if it is well described, your banker should accept it. I will check to see what the PCAOB requirements are. Name and explain five errors in the above scenario that violate principles or rules you have learned about auditing.
Explanation / Answer
Five violtaions of principles of auditing are as follows;
1. Not communicating with predecessor auditor. It is good practice in auditing to communicate with previous auditor whenever there is change or rotation od auditor. It is always important to know the previous audtor's feedback regarding the state of affairs of the client and to get suggestions regarding improvement options in the audit.
2. Understanding of the industry of the client. Prior understanding of the client's industry , its general norms, acceptable practices, benchmark standars and average financial ratios , strategic peculiratities, internal control practices etc are very important for an auditor to accept auditing assignment.
3. Yu's assurance that the new accountant will be helped to produce financial statements in proper frame is violation of auditing principles as an audiote cannot get involved in clients book keeping activities.
4. Yu's assurance that someone who knows Hymn will do the audit on the ground of prsonal trust is inappropriate . Auditor should always maintain a standard of independence and any personal realtionship like relationship based on trust should not be part of an understanding of audit.
5. The inventory has been counted already and will not be counted by Yu. Yu accepted this arrangement if the required information is available. This is a violation of the principle of basic auditing.
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