Question

Read the following cases. Select two of the cases and state whether the action or situation shows a violation, or potential violation, of the AICPA Code of Professional Conduct. Explain why and cite the relevant rule or interpretation. As a class, let’s be sure to answer all the different cases.

Certified public account (CPA), Sal Colt, has discovered a way to eliminate most of the boring work of processing routine accounts receivable confirmations by contracting with the Cohen Mail Service. After the auditor has prepared the confirmations, Cohen stuffs them in envelopes, mails them, receives the return replies, opens the replies, and returns them to Colt.

Without consulting Jora Cramer, its CPA, Cadentoe Corporation has changed its accounting so that it is not in conformity with the Generally Accepted Accounting Principles (GAAP). During the regular audit engagement, Cramer discovers that the statements based on the accounts are so grossly misleading that they might be considered fraudulent. Cramer resigns the engagement after a heated argument. Cramer knows that the statements will be given to Sandy Panzer, a friend at the Last National Bank, and that Panzer is not a very astute reader of the complicated financial statements. Two day later, Panzer calls Cramer and asks some general questions about Cadentoe’s statements and remarks favorably on the very thing that is misrepresented. Cramer corrects the erroneous analysis and Panzer is very much surprised.

A CPA who had reached retirement age arranged to sell the practice to another certified public accountant. Their agreement called for the review of all audit documentation and business correspondence by the accountant purchasing the practice.

Martha Jacoby, CPA, withdrew from the audit of Harvard Company after discovering irregularities in Harvard’s income tax returns. One week later, Jacoby received a phone call from Jake Henry, CPA, who explained that he had just been retained by Harvard Company to replace her. Henry asked Jacoby why she withdrew from the Harvard engagement, and she told him.

Chen Wallace, CPA, has two audit clients: Willingham Corporation owned by Jayden Willingham, and Ward Corporation owned by Bailey Ward. Willingham Corp. sells a large proportion of its products to Ward Corp., which amounts to 60 percent of Ward Corp.’s purchases in most years. Willingham and Ward are also Wallace’s tax clients as individuals. This year, while preparing Ward’s tax return, Wallace discovered information that suggested Ward Corporation is in a failing financial position. In consideration of the fact that the companies and individuals are mutual clients, Wallace discussed Ward Corporation’s financial difficulties with Willingham.

Ashley Fiddle, CPA, prepared an uncontested claim for a tax refund on Faddle Corporation’s amended tax return. The fee for the service was 30 percent of the amount the IRS rules to be a proper refund. The claim was for $300,000.

After Faddle had won a $200,000 refund and Fiddle collected $60,000 fee, Jordan Faddle the president, invited Fiddle to be the auditor for Faddle Corporation.

Burgess Company engaged Kim Philby, CPA, to audit Maclean Corporation in connection with a possible initial public offering (IPO) of stock registered with the Security and Exchange Commission (SEC). Burgess Company established a holding company named Cairncross Inc. and asked Philby to issue an engagement letter addressed to Cairncross stating that Cairncross would receive the auditors’ report. Caricross has no assets and Philby agreed to charge a fee for the audit of Maclean only if the IPO is successful.

Answer 1