Mary Frost's Company

An implicit theme of this case that I want students to recognize is the contrast between the persistent and vigorous efforts of David Sokol to “get to the bottom” of the suspicious items he uncovered in JWP’s accounting records versus what Judge William Conner referred to as the “spinelessness” of JWP’s auditors. The JWP audits were similar to most problem audits in that the auditors encountered numerous red flags and questionable entries in the client’s accounting records but, for whatever reason, apparently failed to thoroughly investigate those items. On the other hand, Sokol refused to be deterred in his investigation of the troubling accounting issues that he discovered. The relationships that existed between members of JWP’s accounting staff and the Ernst & Young audit team apparently influenced the outcome of the JWP audits. Of course, the Sarbanes-Oxley Act of 2002

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

The CPA firm should not issue an unqualified opinion based on these circumstances. The unpaid accounting fees may cause the CPA firm to have doubts about the client’s ability and willingness to pay for its services. As a result, the CPA firm’s judgment may be influenced by these doubts, and it may not be able to properly evaluate the client during the audit in a manner that is unbiased and impartial. Instead, the CPA firm should issue a qualified opinion that discloses the potential lack of independence caused by the past due billing. It is essential for CPAs to follow the standards of independence so that they maintain a reputation of integrity among the public (Dodaro, 2013).

This paper will address the Securities and Exchange Commission’s rationale for charging Cardillo executives with the violations outlined in the case study and identify who was in violation or compliance with the AICPA’s Code of Professional Conduct and the reasons they were or were not complying. This paper will also analyze the actions taken by Cardillo’s outside auditors, evaluate the level of efficiency of the audit risk management, determine whether or not the five components of internal controls were being properly followed and argue for or against whether auditors have a responsibility to assess the judgment of the decisions made by Cardillo’s management.

The entity in question did not receive an opinion from the audit firm this is because they are provided with few procedures, which do not suffice to provide assurance about the statements. (Fischer, et, al, 2012)Although the audit firm is supposed to come up with opinions concerning the financial position of the county, the G.A.S.B provides limited procedures for the audit firm to manipulate. (Ruppel,

There are several challenges in using financial information from previous periods in this audit. Mainly, the fact that Michael and Brian performed the audits of the previous year’s means that they are biased to believe and trust the information unequivocally. Secondly the fact that CMD was committing fraud by fabricating and destroying evidence and in some cases their third party clients were colluding along with them makes the evidence not trustworthy. An example of this is in the sales returns and allowances. Using the $4.5 million number and not accounting for the $5.3million fourth quarter number. This would seriously affect the company’s liquidity activity ratios Also, using the $7million figure that Michael and Brian came up with, when the number was actually $12million is a huge misstatement

In the Enron case, The Securities and Exchange Commission (SEC) and Congress conducted an investigation into Enron's collapse. The authorities re-examined the roles of corporate watchdogs, including corporate boards of directors, auditors, investment banks, credit rating agencies and lawyers. It could be that the watchdogs had too tight relations with the company's executives. That is why no one questioned the Enron's aggressive accounting strategies. To prevent such collapses, someone needs to look into the possible conflict of interest. The dilemma is that auditors should perform in the interests of the investors, but they are paid by the audited company, which makes it more difficult for them to exercise tough decisions. The auditors should not perform some particular consulting services for the firms that they audit. Another belief is that there should be more severe consequences for those committing financial crimes and causing fall of the companies.

GAAS requires an auditor to write a report to express an opinion in regards to the financial statements, taken as a whole, or notate that an opinion cannot be expressed based on the facts given (Generally Accounting Auditing Standards, 2016). When the auditor is unable to express an overall opinion, the auditor should list the reasons why in the auditor’s report. When an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taken, in the auditor’s report. (“Generally Accepted Accounting Principles,” n.d.). In 1999, Grant Thornton issued an unqualified audit opinion. Grant Thornton acknowledged the firm’s duty to “obtain reasonable assurance about whether the bank’s financial statements are free of material misstatement” and the opinion stated that the firm had found such assurance (Grant Thornton LLP v. the OCC, 2008). The auditor’s opinion should provide reasonable assurance that the financial statements presented are fair in all aspects. The audit’s opinion does not have to have absolute assurance, however, it should give a fair view to follow the financial reporting framework (Auditor’s Report-What is an auditor’s report?, 2015). The unqualified audit opinion raised many questions with our client because for many years, our client, OCC, had cited Keystone Bank with many

This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.

This case incorporates many ethical issues. While Candy was aware that her new position was going to be very demanding and that she would have to keep track of and properly document all government project-related work activities, she could have never imagined to be the situation that arose in the case study. The first ethical issue encountered in the case study is whether the CPA firm will be able to give truly independent reviews of the Artifice Company after one of their employees leaves to become controller at the company. The case does not mention how this issue was handled but it could been seen as an independence issue from the outside looking in. The CPA firm is required to maintain independence in appearance and fact so it could become a problem later if someone were to learn that a former employee of the CPA firm that took part in reviews and consulting is now acting as the company’s controller. An outsider may get the impression that the firm could rely on their former employee too heavily and not maintain professional skepticism. The next issue encountered is that a number of intercompany checks are being written to other business units and are being treated in a suspicious manner. The fact that these checks are being treated as capital contributions instead of revenue is a serious ethical issues because it not only could be considered

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

Integrity might cause problems in this case as the main persons in this organization are family members and there are also family members with high functions in the bank and JRW Realty with which Prefab has close business relations. Moreover, the members of the audit and compensation committee are not all independent of the firm and therefore, the likelihood of fraud or material misstatements in the financial statements is quite high. The profitability of the engagement to the auditor should be considered as well. Due to the extensive investigation the auditor has to do, especially due to the relationships between the people at the top management and the independence of the audit and compensation committee, the profitability might be a concern. Furthermore, from the analysis of the business risks of accepting the audit it can be concluded that there are several severe problem areas in which fraud or material misstatements in the financial statements can take place. At the Prefab Sprout Company the risk of fraud or material misstatements is considered to be very high and therefore, the engagement should not be accepted.

Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.

A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of