Problems LO1,2 232.

John Clinton, owner of Clinton Company, applied for a bank loan and was informed by the banker that audited nancial statements of the business had to be submitted before the bank could consider the loan application. Clinton then retained Arthur Jones, CPA, to perform an audit. Clinton informed Jones that audited nancial statements were required by the bank and that the audit must be completed within three weeks. Clinton also promised to pay Jones a xed fee plus a bonus if the bank approved the loan. Jones agreed and accepted the engagement. The rst step taken by Jones was to hire two accounting students to conduct the audit. He spent several hours telling them exactly what to do. Jones told the students not to spend time reviewing controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Clinton Companys nancial statements. The students followed Joness instructions and after two weeks gave Jones the nancial statements, which did not include any notes. Jones reviewed the statements and prepared an unqualied audit report. The report, however, did not refer to generally accepted accounting principles. Required: List on the left side of a sheet of paper the generally accepted auditing standards that were violated by Jones, and indicate how the actions of Jones resulted in a failure to comply with each standard. Organize your answer as follows:

Generally Accepted Auditing Standards

Actions by Jones Resulting in Failure to Comply with Generally Accepted Auditing Standards General Standards Jones hired two accounting students and spent several hours telling them what to do. This is a violation because a few hours is not adequate technical training; nor will they be proficient enough, at that time to perform an audit. Employers typically prefer to hire auditors with 2-5 years of experience, not to mention, neither of the students have any certifications, let alone a CPA or CIA credentials. Clinton promises to pay Jones a xed fee plus a bonus if the bank approved

General Standards (1) The auditor must have adequate technical training and prociency to perform the audit. (2) An independent in professional ethical attitude is to be maintained by the auditor or auditors. (3) Professional attention and caution should have been exercised in the planning and performing audits preparation of the report.

the loan, Jones is not working with an independent attitude because he has a financial stake in the outcome of this audit. Jones reviewed the statements and prepared an unqualified audit report. The report, however, did not refer to generally accepted accounting principles. Reviewing work does not qualify professional attention, not adhering to GAAP standards does not exercise caution.

Standards of Field Work Standards of Field Work (1) Auditors should first professional plan the work and must properly supervise. (2) Auditors should attain appropriate understanding of the entity as a while including its internal control, to the assess risk of material misstatement of the financial statements. (3) Auditors must obtain accurate audit findings by performing value audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. Jones did not supervise the students and further went to advise them, in his absence, to not review controls; meaning the work wasnt done correctly. Also, he did not put any consideration into hiring qualified staff. Jones only gave instructions to the student to prove the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support nancial statements, he did not ask them, nor did he himself, do research to understand the entity, try to assess the risk of material misstatement of the financial statements. He did not perform value audit procedures; he only assessed the mathematical accuracy of the records and summarizing the accounts.

Standards of Reporting Standards of Reporting (1) The report should reflect whether or not the financial statements are in the guidelines according to the generally accepted accounting principles. (2) The report must identify situations in The report does not reference the GAAP. They did not perform an accurate audit; the report should have stated no opinion can be expressed. ---.

which such principles have not been consistently observed previously. (3) Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. (4) The report shall contain an expression of opinion regarding the financial statements, taken as a whole.

The report doesnt contain a single informative disclosure stated in the report. The report cannot contain an expression of opinion regarding the financial statement taken as a whole because, even if he did hire a proper auditing staff, they only checked the mathematical accuracy and did not include any notes. The report should also contain a clear indication of the character in the auditor's work for which the audition is held accountable. Jones report contains an expression of opinion that is not based on the results of a proper audit. He should repudiate the opinion, because he failed to conduct an audit in accordance with GAAP.