Question

Eliot Rey, the owner of a publicly held technology company, asked Mary Messup, CPA, to conduct an audit of the company’s records. The financial statements to be audited covered a two-year period. The statements needed to be ready to submit to the SEC by September 30, 2017. Rey also needed to provide the audited financial statements to their bank as part of a large loan application. Messup immediately accepted the engagement and agreed to provide an auditor’s report within one month. Rey agreed to pay Messup her normal audit fee plus a percentage of the loan if it was approved. Messup hired two Sac State accounting graduates (both graduated in May 2017) to conduct the audit. She spent several hours going over what they needed to do. She told the new hires not to spend any time reviewing the client’s system of internal control but to concentrate on checking the mathematical accuracy of the general ledger and summarizing the data in the accounting records that supported Rey’s financial statements. The new hires followed Messup’ instructions. They competed the audit procedures in two days. They did notice that the company failed to include the terms of a large note payable in the footnotes, but they were nervous about talking to Mr. Rey about that. They did talk to Mr. Rey about the fact that although 25% of the accounts receivable were over 120 days old, there was no allowance for doubtful accounts included. Mr. Rey said they shouldn’t be concerned about that. They made a note of his response in the workpapers. They turned over the workpapers to Messup along with the financial statements prepared by the client. Messup gave an unmodified (clean) opinion on the financials.

REQUIRED: For each of the auditing principles listed, identify the action(s) taken (or not taken) by Messup or her assistants that support(s) their compliance with the requirement. 1. Auditors must be technically competent.

2. Auditors must comply with professional ethics.

3. Auditors must use professional judgment and maintain professional skepticism.

4. Auditors must plan work and supervise assistants.

Answer 1

1. Auditors must be technically competent.

Competency is the ability to carry out an assignment in a proper manner ,ie. giving the just care & caution as is required.

Here, even though Mary Messup has the required qualifications & experience, her methodology of skipping testing of internal controls , seems to be questionable, showing lack of required care & diligence.

She & her assistants must have test-checked & satisfied themselves as to the adequacy /reliability of the existing    internal control system.

2. Auditors must comply with professional ethics.

Professional ethics demand that every auditor must carry out his audit assignment , as per the cosde of ethics set out by the professional body.ie. He must be honest & forthright in his opinion about the financial conduct of the business--without any bias for any personal leanings--so that his actions do not discredit the profession.

Here, Mary Messup seems to have been influenced by "audit fee plus a percentage of the loan if it was approved" package--in agreeing to conduct the audit in a short time ,overlooking procedures such as leaving out the internal control verification or the puported saving of time by the assistants , in not taking up issues such as long-term loan footnotes & getting it cleared with both their boss & Mr. Rey.

3. Auditors must use professional judgment and maintain professional skepticism.

Professional skepticism refers to the questioning mind of the auditor ,that makes him ever- alert & constant awareness , to certain conditions that point to a possible misstatement, may be due to error or fraud, & hence making critical assessment of the made-available supporting audit evidence.This helps him ,to make a proper judgement .

Here, Mary Messup was all for only , obliging Mr. Rey in timely conclusion of audit & unqualified report generation

Hence she has really messed up the audit , by instructing her assistants to skip the very essential part of the audit(testing the veracity of internal controls,in place) & to just do the mathematical accuracy.

An unqualified report , with these 2 issues , is not a good professional step.It is bound to bring disrepute to the whole profession, that they can buy CPAs

4. Auditors must plan work and supervise assistants.

Even though she has planned the audit at length, she has only instructed them in a wrong manner, without any proper foundation.She has not checked about the footnotes to the long-term loans nor for provision for doubtful debts,even when the matter was reported to her , before report-generation.

She must periodically sat with the assistants, got to know about the issues & sorted out with Mr. Rey.