Question

Ray, the owner of a small company, asked Holmes, a CPA, to conduct
an audit of the company’s records. Ray told Holmes that 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
three 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
internal controls but instead to concentrate on proving the mathematical accuracy of the
ledger accounts and summarizing the data in the accounting records that supported Ray’s
financial statements. The students followed Holmes’s instructions and after two weeks
gave Holmes the financial statements, which did not include footnotes. Holmes reviewed
the statements and prepared an unmodified auditor’s report. The report did not refer to
generally accepted accounting principles or to 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 answer as follows:*
1) Brief Description of principle
2)holmes’ actions resulting in Failure to
Comply with the principle

Answer 1

BRIEF DESCRIPTION OF PRINCIPLE	HOLMES' ACTIONS RESULTING IN FAILURE TO COMPLY WITH PRINCIPLE
The auditor must possess the competency and capabilities to perform the audit.	Holmes hired to accounting students, this may look like a training arrangement which is a general norm but Holmes chose not to look after the audit work and instead delegated the whole work to students only. Instead, he should have taken students only for helping hand purpose.
The auditor must comply with ethical requirements, which include maintaining independence in mental attitude in all matters relating to the audit.	Holmes compensation included a bonus if the loan was granted. Loan could not have been granted if Holmes had given qualified report. Thus there was conflict of interest in audit engagement which led to overlooking of various things
The auditor must maintain professional skepticism and exercise professional judgment in the performance of the audit and the preparation of the report.	Maintaining professional skepticism and exercising professional judgment require critical review at every level of supervision of the work done and the judgments exercised by those assisting in the audit. Holmes did not review the work or the judgments of the assistants and clearly failed to adhere to this standard.
The auditor must adequately plan the work and must properly supervise any assistants.	Holmes did not hire or planned to hire any experienced assistant, instead, he employed two accounting employees and also did not took active part in proceedings
The auditor must identify and assess the risks of material misstatement based on a sufficient understanding of the entity and its environment, including its internal control, to design the nature, timing, and extent of further audit procedures.	Holmes specifically told assistants to not look over the internal controls and instead just ensure that financial accuracy is their.
The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.	Holmes assistants did not acquire any audit evidence instead they focused just on mathematical accuracy of accounts
The auditor must assess whether the financial statements are presented in accordance with the financial reporting framework.	Holmes did no reference to GAAP in his report, he should have mentioned that no opinion on the same can be made as it has not been checked.