Question

The owner of a small company asked a CPA to conduct an audit of the company's records. The owner of the company told the CPA that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. The CPA immediately accepted the engagement and agreed to provide an auditor's report within three weeks. The owner agreed to pay the CPA a fixed fee plus a bonus if the load was granted.

The CPA hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. The CPA told the students not to spend time reviewing the 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 the company's financial statements. The students followed the CPA's instructions and after two weeks gave the CPA the financial statements which did not include any footnotes. The CPA reviewed the statements and prepared an unmodified auditor's report. The report did not refer to GAAP or to the consistent application of GAAP.

Briefly describe at least three principles underlying AICPA auditing standards and indicate how the actions of the CPA resulted in a failure to comply with each principle.

Answer 1

Per the GAAP standards of AICPA an auditor ought to have the requisite technical and competence to carry out the audit. The act of hiring two students to do the work was highly inappropriate. Only those with proper education can conduct an audit, and the students do not qualify.

Second, an auditor must have mental independence in all matters relating to the auditing. To be true to this standard, the CPA must be fair to everyone, depending on that report. In this, the CPA has acted with bias since he did not spend time for verifying the accuracy of the accounts because of the conflict put forth by the bonus offered by the client. Regardless the CPA should have done their due dilligence, which they didn't

Third, an auditor must Practice qualified care in performing the audit and drawing up the report. The CPA needs to execute his work carefully. Care means that there is thorough supervision, review of the job done. The CPA gave students the work, and he did not review it.