Chen, CPA, is the auditor for Greenleaf Manufacturing Corporation, a privately owned company that has a June
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Chen confronted the president of Greenleaf, who admitted that a secret agreement existed but said it was necessary to treat the lease as an operating lease to meet the current ratio requirement of the pending loan and that nobody would ever discover the secret agreement with the lessor. The president said that if Chen did not issue his report by September 30, Greenleaf would sue Chen for substantial damages that would result from not getting the loan. Under this pressure and because the audit files contained a copy of the 5-year lease agreement that supported the operating lease treatment, Chen issued his report with an unqualified opinion on September 29.
Despite the fact that the loan was received, Greenleaf went bankrupt within 2 years. The bank is suing Chen to recover its losses on the loan, and the lessor is suing Chen to recover uncollected rents.
Required
Answer the following questions, setting forth reasons for any conclusions stated:
a. Is Chen liable to the bank?
b. Is Chen liable to the lessor?
c. Is there potential for criminal action against Chen?*
Audit Report
The audit report is issued by a certified public accountant who is appointed by the shareholders to provide assurance upon the truth and fairness of the financial statements prepared by the managers of the company. Audit report contains the... Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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Related Book For
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley
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