Essay on Case Fred Stern & Company, Inc.

Although the auditing profession was in it's infancy in the early 1920's, generally accepted auditing procedures had not yet been developed at that time so the balance sheet was considered the reliable financial source required.

A balance sheet gives an overall picture of a company's financial situation by showing the total assets of a business, including liabilities plus equity. Current assets can include cash, accounts receivable, inventory and prepayments for insurance. The balance sheet is used by investors to get an idea of what the shareholders have invested, including

When a law enforcement officer or other public employee is accused of potentially criminal conduct, they may face three different kinds of interviews or interrogations. If an officer is interviewed as a criminal suspect, they have the absolute right to decline to answer any questions, or to insist that they have a lawyer of their choosing to attend the interview. The first is type is during a criminal investigation; the second is during a disciplinary investigation and finally during the course of civil litigation where there has been damages. During a criminal interview, there is no professional, ethical or moral duty to participate especially without the assistance of an attorney to represent the officer under investigation. It has come to a surprise that many experienced officers will waive their right to silence and give the investigators an audio recorded statement. Some of the inexperienced criminals do not make incriminating statements. The motive for cooperation is to avoid unfavorable publicity.

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

In the case of Anthony, a New Jersey resident and owner of a waste disposal company in the state of New Jersey, and his two business associates, Paul and Silvio, whom suffered severe injuries due to a motor vehicle accident caused by a negligent truck driver; they have great standing to sue against the neglectful driver and the company associated with the ownership of the vehicle. Regardless of the diversity of their residency/ citizenship, the affected party can proceed to sue the corporation responsible for the damages caused by their staff and property; reason being that they are protected under the Constitution’s diversity of citizenship, and the privileges and immunities clause. Furthermore, these two constitutional clauses in addition to the commerce clause, dictate the court that the matter needs to be brought to.

Upon reviewing your post, the insights I gain are the importance of companies following the rules and regulations enforced by The Securities and Exchange commission (SEC). In addition to the (SEC) financial accounting are also monitor by the Financial Accounting Standards Board (FASB) regulate the financial statements issued to shareholders. Zimmerman, J. L. (2014). I also realized the importance of companies making certain that the financial information posted, is accurate. By doing so, they help others such as stockholders and investors to make decisions that will be most beneficial to them.

Since the financial crisis investors have become less confident in the companies within the market. In order to restore confidence within the market and the audits of their financial statements Senator Sarbanes and Representative Oxley created the legislation known as the Sarbanes Oxley Act which came into effect in 2002. The legislation created major regulations on company financial reporting and the regulation of it. Forcing management to be accountable for the financial reporting and internal controls within their company and requiring the audit committees to report on their opinion of the company’s internal processes. (Soxlaw.com)

Please answer the questions posed at the end of each case study in essay form.  Each essay will be judged on your capacity to present strong, logical discussions that support your conclusions.

Prior to Sarbanes Oxley act, auditing firms were self regulatory. It may happen several times that challenging the counts of the companies damage the relationship with the clients. The frauds of the companies cannot be detected easily. There are many risks associated with the auditing report since it will not be able to report the actual position of the companies. The Sarbanes Oxley act states that it shall be unlawful to contravenes the provisions of the commission because it is not in the public interest or it is unprotected for investors, for any other person to take any action to fraudulently influence, manipulate, coerce and mislead any independent person in the performance of preparing the audit report of the financial statements of any concern.

First of all, because this helps to prevent fraudulent practices. It makes easier for management, shareholders and potential investors to digest the information. It also allows comparing these statements against business competitors or the company’s own past statements to measure

Auditors should insist that engagement letters identify third parties, so that if there is an issue of fraud they know who they are liable for. It is important that they are familiar with the third party companies, because they are essentially representing them and supporting their investments with their audit report.

A. There is no gain or loss realized or recognized by Tom upon the formation of the S-Corp. The beginning balance of stock basis is $ 172,000 which is the total cash contributed by Tom to the new corporation. (See appendix A)

According to AU-C Section 240 paragraph .05, when conducting an audit in accordance with GAAS, an auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement due to error or fraud (2012, December 15). To obtain reasonable assurance, the auditor is responsible for maintaining professional skepticism, considering management’s ability to override controls, and recognizing that audit procedures for detecting error may not be effective in detecting fraud according to paragraph .08 (2012, December

The risk that a company is insolvent is a component of audit risk, which should be taken into account by auditors. Audit risk is defined as "the risk that that the auditor will give an inappropriate audit opinion when the financial report is materially misstated". Auditors risk issuing an unqualified audit opinion on financial statements that are materially misstated or omit material transactions; therefore the procedures used in the audit must be planned according to the identified audit risk. The components of audit risk are inherent risk, control risk and detection risk.

Auditors who do not perform independently will face the potential risk of losing professional credibility and being punished with fines or imprisonment. Moreover, auditors should act ethically in the interest of public and provide unbiased audit reports to the public, especially to those who will make future decisions based on these audited financial statements, such as investors, employees or lenders. It does not mean that the auditor could not behave in both parties’ interest at the same time, but when a conflict occurs between interest of public and that of management, auditors should choose to behave independently, keep audit work fair and honest, and ensure their work assists the public to make a right evaluation on the audited client.