e. Of the following, the most significant risk factor relating to the risk of misstatement arising from fraudulent financial reporting for SSC is that Multiple Choice Company officers serve on the board of directors. The company must refinance a significant portion of its debt.

e. Of the following, the most significant risk factor relating to the risk of misstatement arising from fraudulent financial reporting for SSC is that Multiple Choice Company officers serve on the board of directors. The company must refinance a significant portion of its debt.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter4: Professional Legal Liability

Section: Chapter Questions

Problem 17RQSC

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Nixon & Co., CPAs, issued an unmodified opinion on the 2015 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with the SEC. Nixon did not detect material misstatements in the financial statements as a result of negligence in the performance of the audit. Based upon the financial statements, Harry Corp. purchased stock in Madison. Shortly thereafter, Madison became insolvent, causing the price of the stock to decline drastically. Harry has commenced legal action against Nixon for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. What would be Nixon’s best defense to such an action? Explain.
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While auditing the financial statements of Petty Corporation, the certified public accounting firm of Trueblue and Smith discovered that its client’s legal expense account was abnormally high. Further investigation of the records indicated the following: a. Since the beginning of the year, several disbursements totaling $15,000 had been made to the law firm of Swindle, Fox, and Kreip.b. Swindle, Fox, and Kreip were not Petty Corpora- tion’s attorneys.c. A review of the canceled checks showed that they had been written and approved by Mary Boghas, the cash disbursements clerk.d. Boghas’s other duties included performing the endof-month bank reconciliation.e. Subsequent investigation revealed that Swindle, Fox, and Kreip are representing Mary Boghas in an unrelated embezzlement case in which she is the defendant. The checks had been written in payment of her personal legal fees.1. What control procedures could Petty Corporation have employed to prevent this unauthorized use of cash?…
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Assume in the DigitPrint case that the venture capitalists do not provide additional financing to the company, even though the accrued expense adjustments have not been made. The company hires an audit firm to conduct an audit of its financial statements to take to a local bank for a loan. The auditors become aware of the unrecorded $1 million in accrued expenses. Liza Doolittle pressures them to delay recording the expenses until after the loan is secured. The auditors do not know whether Henry Higgins is aware of all the facts. Identify the stakeholders in this case. What alternatives are available to the auditors? Use the AICPA Code of Professional Conduct and Josephson’s Six Pillars of Character to evaluate the ethics of the alternative courses of action.
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