Liability in a Review Engagement. Mason & Dilworth (M&D), CPAs, were auditors forHotshot Company, a closely held corporation owned by 30 residents of the area. Hotshothad previously engaged M&D to perform some compilation and tax work. Bubba Crass, Hotshot’s president and holder of 15 percent of the stock, said he needed something morethan these services. He told Mason, the partner in charge, that he wanted financial statements for internal use, primarily for management purposes but also to obtain short-termloans from financial institutions. Mason recommended a “review” of the financial statements and did not prepare an engagement letter.During the review work, Mason had some reservations about the financial statements.Mason told Dilworth at various times he was “uneasy about certain figures and conclusions,” but he would “take Crass’s word about the validity of certain entries since the reviewwas primarily for internal use in any event and was not an audit.”M&D did not discover a material act of fraud committed by Crass. The fraud would havebeen detected had Mason not relied so much on the unsupported statements Crass madeconcerning the validity of the entries about which he had felt so uneasy.Required:a. What potential liability might M&D have to Hotshot Company and other stockholders?b. What potential liability might M&D have to financial institutions that used the financialstatements in connection with making loans to Hotshot Company?
Liability in a Review Engagement. Mason & Dilworth (M&D), CPAs, were auditors for
Hotshot Company, a closely held corporation owned by 30 residents of the area. Hotshot
had previously engaged M&D to perform some compilation and tax work. Bubba Crass, Hotshot’s president and holder of 15 percent of the stock, said he needed something more
than these services. He told Mason, the partner in charge, that he wanted financial statements for internal use, primarily for management purposes but also to obtain short-term
loans from financial institutions. Mason recommended a “review” of the financial statements and did not prepare an engagement letter.
During the review work, Mason had some reservations about the financial statements.
Mason told Dilworth at various times he was “uneasy about certain figures and conclusions,” but he would “take Crass’s word about the validity of certain entries since the review
was primarily for internal use in any event and was not an audit.”
M&D did not discover a material act of fraud committed by Crass. The fraud would have
been detected had Mason not relied so much on the unsupported statements Crass made
concerning the validity of the entries about which he had felt so uneasy.
Required:
a. What
b. What potential liability might M&D have to financial institutions that used the financial
statements in connection with making loans to Hotshot Company?
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