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Auditing Standards Case Study: an in-depth discussion

2.43 Auditing Standards Case Study. Ray, the owner of a small company, asked Holmes, CPA, to conduct an audit of the company's records. Ray told Holmes that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditor's report within three weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted. Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing the controls but, instead, to concentrate on proving the mathematical accuracy of the ledger accounts and on summarizing the data in the accounting records that support Ray's financial statements. The students followed Holmes's instructions and after two weeks gave Holmes the financial statements, which did not include footnotes. Holmes studied the statements and prepared an unqualified auditor's report. The report, however, did not refer to generally accepted accounting principles or to the fact that Ray had changed the accounting standard for capitalizing interest.

Briefly describe each of the generally accepted auditing standards and indicate how the action(s) of Holmes resulted in a failure to comply with each standard.

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General Standards
1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
2. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.
3. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.

Holmes students were inadequately trained for an audit. Independence was compromised by the bonus fee contingent on results. Planning and performance was almost non-existent.

Standards of Field Work
1. The work is to be adequately planned and assistants, if any, are to be properly supervised.
2. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be ...

Solution Summary

The 500 word solution includes a detailed discussion of auditing standards as they apply to the details of the case presented. It provides a good understanding of a practical application of ethereal standards.