Question

Mortimore Beancounter, CPA, is employed by the accounting firm Doolittle & Prosper, LLP. He was assigned to audit Cook & De’Books, Inc. Failing to discover that the company’s financial statements contained a material mistake, Mortimore rendered an unqualified audit opinion. Unbeknownst to Mortimore, Cook & De’Books later used the statements and his opinion to secure a loan from Last National Bank. Cook & De’Books subsequently went bankrupt. Cook & De’Books and the Bank later sue Mortimore and Doolittle & Prosper for negligence.

A) What is the likely result of the lawsuit between Cook & De’Books and Doolittle & Prosper and state why?

B) What is the likely result of the lawsuit between Cook & De’Books and Last National Bank and state why?

Answer 1

Case:

Mortimore Beancounter, CPA, is employed by the accounting firm Doolittle & Proper, LLP. He was assigned to audit cook & De, Books, inc. Failing to discover that the company's financial statements contained a material mistake, Mortimer rendered n unqualified audit opinion.

Study:

A financial statement audit is the examination of an entity's financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures.

Audits have become increasingly common as the complexity of the two primary accounting frameworks, Generally Accepted Accounting Principles and International Financial Reporting Standards.

The primary stages of an audit are:

1. Planning and risk assessment. Involves gaining an understanding of the business and the business environment in which it operates, and using this information to assess whether there may be risks that could impact the financial statements.

2. Internal controls testing. Involves the assessment of the effectiveness of an entity's suite of controls, concentrating on such areas as proper authorization, the safeguarding of assets, and the segregation of duties. This can involve an array of tests conducted on a sampling of transactions to determine the degree of control effectiveness. A high level of effectiveness allows the auditors to scale back some of their later audit procedures. If the controls are ineffective (i.e., there is a high risk of material misstatement), then the auditors must use other procedures to examine the financial statements. There are a variety of risk assessment questionnaires available that can assist with internal controls testing.

3. Substantive procedures. Involves a broad array of procedures, of which a small sampling are:

• Analysis. Conduct a ratio comparison with historical, forecasted, and industry results to spot anomalies.

• Cash. Review bank reconciliations, count on-hand cash, confirm restrictions on bank balances, issue bank confirmations.

• Marketable securities. Confirm securities, review subsequent transactions, verify market value.

• Accounts receivable. Confirm account balances, investigate subsequent collections, test year-end sales and cutoff procedures.

• Inventory. Observe the physical inventory count, obtain confirmation of inventories held at other locations, test shipping and receiving cutoff procedures, examine paid supplier invoices, test the computation of allocated overhead, review current production costs, trace compiled inventory costs to the general ledger.

• Fixed assets. Observe assets, review purchase and disposal authorizations, review lease documents, examine appraisal reports, recalculate depreciation and amortization.

• Accounts payable. Confirm accounts, test year-end cutoff.

• Accrued expenses. Examine subsequent payments, compare balances to prior years, recompute accruals.

• Debt. Confirm with lenders, review lease agreements, review references in the board of directors minutes.

• Revenue. Examine documents supporting a selection of sales, review subsequent transactions, recalculate percentage of completion computations, review the history of sales returns and allowances.

• Expenses. Examine documents supporting a selection of expenses, review subsequent transactions, confirm unusual items with suppliers.

a) The lawsuit by Cook & De’Books on Doolittle & Prosper is the breach of contract as per the Financial statement audit process of Fixed assets the Mortimore Beancounter failed to identify the material mistake in the contact between the national bank and  Cook & De'Books. Cook & De'Books subsequently went bankrupt. The breach of contract can be sue on the Mortimore Beancounter, and Doolittle & prosper by Cook & Doolittle & Prosper.

b) The lawsuit by National Bank on Cook & De’Books is bankrupt. As bankruptcy affects your debts and assets. Therefore, the bankruptcy court will have jurisdiction over (the right to decide) any case involving an allegation that you owe money because you either failed to pay a debt or accidentally harmed. It can be recovered from Cook & De’Books after declaring insolvent the debt can be recovered by selling assets, securities, and equity. etc...

In the first case, the Doolittle & Prosper is liable to the breach of contract.

In the second case, Cook & De, Books are bankrupt.