Question

Deanza, CPA, accepted an engagement to audit the financial statements of Foothill Co., a new client. Foothill is a publicly held retailing entity that recently replaced its operating management.
In the course of applying audit procedures, Deanza discovered that Foothill's financial statements may be materially misstated due to the existence of fraud.

Required:
(a) Describe Deanza's responsibilities on the circumstances described above.

b) Describe Deanza's responsibilities for reporting on Foothill's financial statements and other communications if Deanza is precluded from applying necessary procedures in searching for frauds.

(c) Describe Deanza's responsibilities for reporting on Foothill's financial statements and other communications if Deanza concludes that Foothill's financial statements are materially affected by frauds.

Answer 1

a) Responsibilities of Deanza -

Auditor should consider performing necessary audit tests to find the relative misstatement in the financial report. It should inquire from the very base and should approach the previous operating management as they were changed. This might be due to the fraud detected by them or they might have got little hint about the fraud. He should check all the relevant reports and invoices received and sent. He should go for checking all the relevant evidential matter.

b) He should find the relevant information and report any fraud that might have been occurred and give his findings in the report accordingly. If he is precluded from applying necessary procedures in searching of frauds, he may report it to the audit committee and the board of directors and demand necessary actions to be taken against such act.

c) He should find the relevant information and report any fraud that might have been occurred and give his findings in the report accordingly. If he finds a fraud has occurred, he should ask them to form correct and revised financial statements with all relevant and material information and then only the audit report can be formed and signed. He should also report this to higher authorities of the company like BOD, audit committee, etc.