Question

In the following scenario, each of the four categories of Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards are violated. In the box below (1) identify the four categories (the “P – R – P – R”) [2 points each], (2) provide a brief description of each category [2 points each], and (3) indicate at least one way that the actions of the auditor in the scenario violates each of the four categories of principles

Joni Thompson, the CEO of a small privately held company, contacted Darrel Folkert, CPA, about conducting an audit of the company’s records. Joni told Darrel that she needed an audit performed in accordance with generally accepted auditing standards (GAAS) in time to submit two years of audited financial statements to a bank as part of a loan application. Darrel immediately accepted the engagement and agreed to provide an audit report within three weeks. Joni agreed to pay Darrel a fixed fee if the loan was granted.

Darrel hired two Portland State University accounting students to conduct the audit and spent a couple of hours telling them exactly what to do. Darrel told the students not to spend time reviewing internal controls because it is not a publicly traded company, but to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Joni’s financial statements. Given the lack of procedures performed by the two accounting students, they did not identify that Joni did not have an allowance for uncollectible accounts, even though more than 50% of the balance in the Accounts Receivable account is two or more years old. The students followed Darrel’s instructions and after two weeks gave Darrel a Balance Sheet, Income Statement, and a Statement of Cash Flows. Darrel received the three statements and immediately prepared an unqualified (clean) audit report. The report did not refer to generally accepted accounting principles (GAAP), and the two accounting students did not check the accounting principles applied in prior periods. There was also no mention as to the responsibility of management or the degree of responsibility that Darrel was taking in the audit report.

Answer 1