The auditor was aware that the goal of her audit was to provide reasonable confidence on financial statements that would be used to make a loan application, but she was unaware of the name of the bank that would ultimately provide the loan. According to the Restatement of Torts, the auditor is normally accountable to the bank that ultimately authorizes the loan for the following

The auditor was aware that the goal of her audit was to provide reasonable confidence on financial statements that would be used to make a loan application, but she was unaware of the name of the bank that would ultimately provide the loan. According to the Restatement of Torts, the auditor is normally accountable to the bank that ultimately authorizes the loan for the following

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 16RQSC

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An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability, the auditor is generally liable to the bank which subsequently grants the loan for:
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to rely on the audited statements. After the audit report is issued, the bank that ultimately made the loan discovers that the audit client’s inventory and accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank alleged that the auditor failed to communicate about the inadequacy of the client’s internal recordkeeping and inventory control. Moreover, the bank claims that the auditors were grossly negligent in not discovering the overvaluation of inventory and accounts receivable. The auditors asserted that there was no way for them to know that the client included in the inventory account $1 million of merchandise in transit to a customer on December 31, 2015. The shipping terms…
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to rely on the audited statements. After the audit report is issued, the bank that ultimately made the loan discovers that the audit client’s inventory and accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank alleged that the auditor failed to communicate about the inadequacy of the client’s internal recordkeeping and inventory control. Moreover, the bank claims that the auditors were grossly negligent in not discovering the overvaluation of inventory and accounts receivable. The auditors asserted that there was no way for them to know that the client included in the inventory account $1 million of merchandise in transit to a customer on December 31, 2015. The shipping terms…
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to rely on the audited statements. After the audit report is issued, the bank that ultimately made the loan discovers that the audit client’s inventory and accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank alleged that the auditor failed to communicate about the inadequacy of the client’s internal recordkeeping and inventory control. Moreover, the bank claims that the auditors were grossly negligent in not discovering the overvaluation of inventory and accounts receivable. The auditors asserted that there was no way for them to know that the client included in the inventory account $1 million of merchandise in transit to a customer on December 31, 2015. The shipping terms…
L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally accepted auditing procedure. Required: a. Under what circumstances could King justify omitting the confirmation of Cycle’s accounts receivable? b. In designing confirmation requests, what factors are likely to affect King’s assessment of the reliability of confirmations that King sends? c. What alternative procedures could King consider performing when replies to positive confirmation requests are not received?
In the audit of Emerson College, the auditor's found the client's working capital to be far below the minimum stipulated in the indenture of long-term mortgage bonds payable. In addition, the College had allowed the required insurance coverage of pledged assets to lapse. These violations were sufficient to cause the bond issue to become payable on demand. If you were the auditor of Emerson College, what are the problems associated with a violation of a debt covenant? What are the potential ways around this problem, if any?
Among the prescribed audit activities provided below, which of the following would effectively help Metro bank determine its proper allowance for loan losses?a. Make visits to the borrower's commercial business site periodically.b. Have procedures in place to identify problem loans in a timely fashion.c. Identify any weaknesses in the institution's lending process.d. Obtain additional collateral for a loan. When assessing the reasonableness of PNB's allowance for loan losses as a whole, you discovered that his estimate differs from the recorded allowance and that the difference is immaterial. How should you address this finding in your audit?a. Reconsider the precision of his estimateb. Record it on the summary of audit differences.c. Propose an adjustment.
Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? A. The CPA is liable only to third parties in privity of contract with the CPA B. The CPA is liable only to known users of the financial statements C. The CPA probably is liable to any person who suffered a loss as a result of the fraud D. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion
Which of the following types of documentary evidence should the auditor consider the most reliable?a. Sales invoice created by the client with the support of proof of delivery from an outside delivery serviceb. Confirmation of debt balances sent and returned directly to the auditorc. Check made by the company and includes a sign of approval of the party receiving the money, which is included in the bank statement sent directly to the auditord. An audit list prepared by the client controller and reviewed by the client treasurer.
The auditor should ordinarily send confirmation requests to all banks with whichthe client has conducted any business during the year, regardless of the year-endbalance, because(1) this procedure will detect kiting activities that would otherwise not be detected.(2) the confirmation form also seeks information about indebtedness to the bank.(3) the sending of confirmation requests to all such banks is required by auditingstandards.(4) this procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.
Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable?a. Are assets that collateralize notes payable critically needed for the entity’s continued existence?b. Are two or more authorized signatures required on checks that repay notes payable?c. Are the proceeds from notes payable used to purchase noncurrent assets?d. Are direct borrowings on notes payable authorized by the board of directors?
Which action is not considered an act discreditable to the accounting profession? a) Being finally determined by a court of competent jurisdiction to have violated any of the federal antidiscrimination laws. b) Having a bank collect notes received from a client in payment of fees. c) Failing to follow standards and procedures established by governmental agencies in audits of grants by those agencies. d) Negligently permitting another to sign a document containing materially false and misleading information.