Module 2 Question 5

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School

Lenoir Community College *

*We aren’t endorsed by this school

Course

ACC 225

Subject

Accounting

Date

Apr 3, 2024

Type

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Pages

Uploaded by muffinman42

Module 2 Critical Thinking Assignment € Submitted 50/50 Total points awarded Help Exit 5 833/833 points awarded eBook References Read the following cases. Required: For each separate case, state whether the action or situation shows a violation of the AICPA Code of Professional Conduct; if so, explain why and cite the relevant rule or interpretation. | ~ Vitn Relevant Rule a. Your client, Contrary Corporation, is very upset over the fact that your audit last year failed to detect an $800,000 inventory ient caused by employee theft and falsification of the records. The board discussed the matter and Yes & Independence Rule ith d its attorneys to explore the ibility of a lawsuit for damages. b. Contrary Corporation filed a lawsuit alleging negligent audit work, seeking $1 million in damages. Yes 9 | Independence Rule c. In response to the lawsuit by Contrary, you decided to bring litigation against certain officers of the company alleging management fraud and deceit. You are asking for a damage judgment of $500,000. VE ‘° ALERERETEIRLE d. The Allright Insurance Company paid Contrary Corporation $700,000 under a fidelity bond covering an inventory theft by employees. Allright is suing your public accounting firm for damages on the grounds of negligent performance of the audit, No 9 Independence Rule claiming that a proper audit would have uncovered the theft sooner and the amount of loss would have been considerably less. e. Your audit client, Science Tech Incorporated, installed a cost accounting system devised by the consulting services department of your firm. The system failed to account properly for certain product costs (according to management), and the system had to be discontinued. Science Tech management was very dissatisfied and filed a lawsuit demanding return No 9 of the $10,000 consulting fee. The audit fee is normally about $50,000, and $10,000 is not an especially large amount for your firm. However, you believe that Science Tech management operated the system improperly. You are willing to do further consulting work at a reduced rate to make the system operate, but you are unwilling to return the entire $10,000 fee. Independence Rule f. A group of dissident shareholders filed a class-action lawsuit against both you and your client, Amalgamated Incorporated, for $30 million. They allege there was a conspiracy to present misleading financial statements in connection No % Independence Rule with a recent merger. g. CPA Ellis Lisa, a shareholder in the firm of Eden, Benjamin, and Block, P.C. (a professional accounting corporation), owns 25 percent of the common stock of Dove Corporation (not a client of Eden, Benjamin, and Block). This year, Dove purchased a 32 percent interest in Tale Company and is accounting for the investment using the equity method of Yes % Independence Rule accounting. The investment amounts to 11 percent of Dove's consolidated net assets. Tale Company has been an audit client of Eden, Benjamin, and Block for 12 years. h. CPAs Mark and Ben Saliba are the father-and-son partners of Queens, LLP. They have a 12 percent joint private investment in ownership of the voting common stock of Hydra Corporation, which is not an audit client of Queens, LLP. However, the firm’s audit client, Howard Company, owns 46 percent of Hydra, and this investment accounts for 20 percent Yes 9 Independence Rule of Howard's assets (using the equity method of accounting). i. Drew Francie and Madison Brian, CPAs, regularly perform the audit of the First National Bank, and the firm is preparing for the audit of the financial statements for the year ended December 31, 2023. (1) Two directors of the First National Bank became partners in Francie and Brian, CPAs, on July 1, 2023, resigning their directorship on that date. They will not participate in the audit. (2) During 2023, the former controller of the First National Bank, now a pariner in Francie and Brian, was frequently called on for assistance regarding loan approvals and the bank’s minimum checking account policy. In addition, the former controller conducted a computer feasibility study for First National. No 9 Independence Rule J. The Cather Corporation is indebted to a CPA for unpaid fees and has offered to give the CPA unsecured interest-bearing notes. Alternatively, Cather Corporation offered to give the CPA two shares of its common stock, after which 10,002 shares Yes 9 Independence Rule would be outstanding. k. May Debra is not yet a CPA but is doing quite well in her first employment with a large public accounting firm. She has been on the job two years and has become an “experienced assistant.” If she passes the CPA exam this year, she will be promoted to senior accountant. This month, during the audit of Row Lumber Company, Debra told the controller that she is Yes Independence Rule remodeling an old house. The controller likes Debra and had a load of needed materials delivered to the house, billing a i Debra at a 70 percent discount—a savings over the normal cash discount of about $300. Debra paid the bill and was happy to have the materials that she otherwise could not afford on her meager salary. |. Groaner Corporation is in financial difficulty. You are about to sign the report on the current audit when your firm’s office Yes 0 Independence Rule manager informs you the audit fee for last year has not yet been paid. m. CPA Aubrey Rowan prepared Goodwin’s tax return this year. Last year, Goodwin prepared the return and paid too much income tax because the tax retum erroneously contained “income” in the amount of $300,000 from an inheritance received } o when dear Aunt Martha died. This year, Goodwin sold the inherited property for $500,000. Goodwin argued with Rowan, Yes 9 Integrity and Objectivity Rule who agreed to omit the sale of the property and the $200,000 gain this year on the grounds that Goodwin had already overpaid tax last year and this omission would make things even. n. CPA Sage Watson is employed by Baker Street Company as its chief accountant. Lee Lestrade, also a CPA and the financial vice president of Baker, owns a trucking company that provides shipping services to Baker in a four-state area. The trucking company needs to buy 14 new trailers, and Lestrade authorized a payment to finance the purchase in the amount of $750,000. The related document cited repayment in terms of reduced trucking charges for the next seven years. Yes @ Integrity and Objectivity Rule Lestrade created the journal entry for this arrangement, charging the $750,000 to prepaid expenses. Watson and Lestrade signed the representation letter to Baker's external auditors and stated that Baker had no related-party transactions that were not disclosed to the auditors. A | 9 9 7 ] ] 9 2 2 9 9 9 9 9 . Explanation The Independence Rule.: In general, when the present management of a client commences or expresses an Intention to commence legal actions against its public accounting firm, the public accounting firm and the client management may be placed In adversary positions In which the management's willingness to make complete disclosures and the auditors’ objectivity may be affected by self-interest. Independence may be Impaired whenever the auditors and the client or its management are In positions of material adverse Interest by reason of actual or threatened litigation. Varlous situations are sometimes difficult to generalize, and the following responses are guldelines expressed In AICPA Ethics Interpretations (Effect of Litigation). a. Independence would be impaired: An expressed Intention by the client to begin litigation alleging deficiencies In audit work Is considered to Impair Independence If the public accounting firm concluded that there Is a strong possibllity that such a claim will actually be filed. b. Independence would be impaired: The commencement of litigation alleging deficiencies In audit work Impairs independence. c. Independence would be impaired: The commencement of litigation by the public accounting firm alleging management fraud or decelt would definitely impair Independence. d. Independence could be impaired: The claim under subrogation by the Insurance company would not necessarily affect auditors’ Independence on its client. In this case, the client and members of management are not the plaintiffs. However, this situation would have to be carefully evaluated by the CPA firm. If members of Contrary management are going to testify on behalf of the Insurance company's Interest and thus act In an adversary

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