Dale Boucher, the owner of a small electronics firm, asked Sally Jones, CPA, to
ID: 2443922 • Letter: D
Question
Dale Boucher, the owner of a small electronics firm, asked Sally Jones, CPA, to conduct an audit of the company's records. Boucher told Jones that the audit was to be completed in time to submit audited financial statements to the bank as part of a loan application. Jones immediately accepted the engagement and agreed to provide an auditor's report within one month. Boucher agreed to pay Jones her normal audit fee plus a percentage of the loan if it was granted.Jones hired two recent accounting graduated to conduct the audit and spent several hours telling them exactly what to do. She told the new hires not to spend time reviewing the client's system of internal control but to concentrate on proving the mathematical accuracy of the general and subsidiary ledgers and summarizing the data in the accounting records that supported Boucher's financial statements. The new hires followed Jone's instructions and after two weeks gave Jones the financial statements excluding footnotes. Jones reviewed the statements and prepared an unqualified auditor's report. The report did not refer to generally accepted accounting principles, and no audit procedures were conducted to verify the year-to-year application of such principles.
Required:
Briefly describe each of the generally accpted auditing standards and indicate how the action(s) of Jones resulted in a failure to comply with each generally accepted auditing standard.
Explanation / Answer
150.02 1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. Jones hired utilized two graduates who had not had enough technical training even though she supervised them throughout the engagement. This prohibited the opportunity of the graduates to have enough understanding of the audit process to assess whether the procedures they were instructed to carry out were acceptable or not. e.g. they did not assess internal controls and could have questioned Jones if they had the technical training. 2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. Professional judgment may have been hampered based on receiving more than just an audit fee - i.e. a portion of the loan. This will particularly come into question if the loan amount is substantially more than the audit fee itself. Jones may have favorably provided an unqualified opinion to receive substantially more remuneration. 3. Due professional care is to be exercised in the performance of the audit and the preparation of the report. 1. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. 3. Sufficient appropriate evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. Jones did not review internal; controls, as a starting point to determine the level of audit risk and subsequent testing e.g. substantive tests to collect audit evidence to support/dispute the financial statements. Only a recalculation of the ledgers were performed, without testing for misstatements and collecting evidence on this basis. Jones has breached all the above standards. 1. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP). As stated in the question, this was not provided. 3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. Also any footnotes were not included and this is another breach of the standard of reporting.
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