AC410 Unit 2 Homework Assignment

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3-31

Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a publicly held company. During the course of the audit, Barber discovered that DGF has been making illegal bribes to foreign government officials to obtain business, and he reported the matter to senior management and the board of directors of DGF.

Required:

If management and the board of directors take appropriate remedial action, should Barber be required to report the matter outside the company?

Describe Barber's appropriate response if management and the board of directors fail to take appropriate remedial action.

3-43

Thomas Gilbert and Susan Bradley formed a professional corporation called “Financial Services Inc.—A Professional Corporation,” each taking 50 percent of the authorized common stock. Gilbert is a CPA and a member of the AICPA. Bradley is a CPCU (Chartered Property Casualty Underwriter). The corporation performs auditing and tax services under Gilbert's direction and insurance services under Bradley's supervision.

One of the corporation's first audit clients was Grandtime Company. Grandtime had total assets of $600,000 and total liabilities of $270,000. In the course of his examination, Gilbert found that Grandtime's building with a carrying value of $240,000 was pledged as collateral for a 10-year term note in the amount of $200,000. The client's financial statements did not mention that the building was pledged as collateral for the 10-year term note. However, as the failure to disclose the lien did not affect either the value of the assets or the amount of the liabilities, and his examination was satisfactory in all other respects, Gilbert rendered an unqualified opinion on Grandtime's financial statements. About two months after the date of his opinion, Gilbert learned that an insurance company was planning to loan Grandtime $150,000 in the form of a first-mortgage note on the building. Realizing that the insurance company was unaware of the existing lien on the building, Gilbert had Bradley notify the insurance company of the fact that Grandtime's building was pledged as collateral for a term note.

Shortly after the events described above, Gilbert was charged with several violations of professional ethics.

Required:

Identify and discuss at least four ethical implications of those acts by Gilbert that were in violation of the AICPA Code of Professional Conduct.

4-21

Jensen, Inc., filed suit against a public accounting firm, alleging that the auditors' negligence was responsible for failure to disclose a large defalcation that had been in process for several years. The public accounting firm responded that it may have been negligent, but that Jensen, Inc., was really to blame because it had completely ignored the public accounting firm's repeated recommendations for improvements in internal control.

Required:

If the public accounting firm was negligent, is it responsible for the loss sustained by the client? Does the failure by Jensen, Inc., to follow the auditors' recommendation for better internal control have any bearing on the question of liability? Explain.

4-26

The international CPA firm of Arthur Andersen faced significant liability in conjunction with its audits of Enron Corporation.

Required:

From a legal liability perspective, describe the unique features of this audit case.

Describe the important implications of this audit case for a firm of public accountants.