Homework

Chapter 5

Auditing – ACC403

October 31, 2010

In the Smith case, the independent CPA was wrong for so many reasons. A CPA firm is hired to basically keep an organization honest. When obtaining your CPA, it is clear that you should never buy into a company’s scheme of falsifying information for financial misstatements. Smith received the anonymous letter revealing a fraudulent plan that Juniper had to gain a loan from a bank. Once Smith confirmed the plan, he should have proceeded with the appropriate steps for a qualified opinion for Juniper. Instead Smith allowed the president of Juniper to intimidate him which now puts him in a position to not only be sued by the bank, but by the lessor also. The lease should have never been listed as operating and Smith was aware of this. Smith should have done the right thing regardless of the threats. According to the text, audit failure occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards. This is exactly what occurred in this case. Smith knowingly issued an incorrect opinion. Once this is proven, Smith will be liable to the bank and the lessor. In cases of audit failure, the law often allows parties who suffered losses to recover some or all of the losses caused by the audit failure. Under common law, auditors have a responsibility to fulfill implied or expressed contracts with clients. The criteria for legal actions against auditors by third parties vary from state to state, so it’s not clear on whether actions for criminal charges could be exercised against Smith.

References

Arens, A., Elder, R.J., & Beasley, M. (2010). Auditing and assurance services: 2010 custom

edition (13th ed.). Upper Saddle River, NJ: Pearson Education. (pages