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Possible fraud in a new audit engagement

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Post, CPA, accepted an engagement to audit the financial statements of General Company, a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying auditing procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud.

Required:

a. Describe Post's responsibilities regarding the circumstance described.

b. Describe Post's responsibilities to report (including what type of opinion) on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for fraud.

c. Describe Post's responsibilities to report (including what type of opinion) on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by fraud.

d. Describe the circumstances in which Post may have a duty to disclose fraud to third parties outside General's management and its audit committee.

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Solution Summary

The solution outlines steps to be taken by the auditor after discovering possible fraud with a new client.

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a. CPA Post must communicate immediately with management about the suspected fraud. He would discuss the fact that it is likely they will not have a 'clean' (unqualified) opinion at the conclusion of their audit. He should propose a separate engagement to determine the actuality of fraud and the possible extent of that fraud. He should ask whether the client would ...

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