AICPA auditing standards : Principles Case

Principles Case

Ray, the owner of a small company, asked Homes, a CPA, to conduct an audit of the company’s records.  Ray told Homes than an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application.  Holmes immediately accepted the engagement and agreed to provide an auditor’s report within 3 weeks.  Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.

Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do.  Holmes told the students not to spend time reviewing the controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Ray’s financial statements.  The students followed Holmes’s instructions and after 2 weeks gave Holmes the financial statements, which did not include footnotes.  Holmes reviewed the statements and prepared an unqualified auditor’s report.  The report did not refer to generally accepted accounting principles or the consistent application of such principles.

Briefly describe each of the principles underlying AICPA auditing standards and indicate how the action(s) of Holmes resulted in a failure to comply with each principle.

Organize your answers as follows*   (AICPA adapted)

Brief Description of Principle                       Holmes’ Actions Resulting in Failure to Comply with the Principle

Provide an opinion about the financial statements

The AICPA auditing standards require the auditor to either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefor in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report. In this case, Holmes express an opinion regarding the financial statements. Moreover, Ray (the owner of a small company) could not tell whether the financial statements were prepared in line with the suitable financial reporting model….Read more

Possess appropriate competence and capabilities

The auditor should possess the competence and capabilities necessary for performing the audit. It was unbecoming for Holmes to seek help from the two students to conduct the audit because they lacked the necessary competence and capabilities. The audit must be conducted by persons with proper education and experience in the field of auditing…Read more