Question

Cragsmore & Company, a medium-sized partnership of CPAs, was engaged by Marlowe Manufacturing, Inc., a closely held corporation, to audit its financial statements for the year ended December 31, 20X3.
Before preparing the audit report, William Cragsmore, a partner, and Joan Willmore, a staff senior, reviewed the disclosures necessary in the notes to the financial statements. One note involved the terms, costs, and obligations of a lease between Marlowe and Acme Leasing Company.
Willmore suggested that the note disclose the following: “Acme Leasing Company is owned by persons who have a 35 percent interest in the capital stock and who are officers of Marlowe Manufacturing, Inc.”
On Cragsmore’s recommendation, this was revised by substituting “minority shareholders” for “persons who have a 35 percent interest in the capital stock and who are officers.”The audit report and financial statements were forwarded to Marlowe Manufacturing for review. The officer-shareholders of Marlowe who also owned Acme Leasing objected to the revised wording and insisted that the note be changed to describe the relationship between Acme and Marlowe as merely one of affiliation. Cragsmore acceded to this request.
The audit report was issued on this basis with an unqualified opinion. But the working papers included the drafts that showed the changes in the wording of the note.
Subsequent to delivery of the audit report, Marlowe suffered a substantial uninsured fire loss and was forced into bankruptcy. The failure of Marlowe to carry any fire insurance coverage was not noted in the financial statements.

Required
What legal problems for Cragsmore & Company are suggested by these facts? Discuss.
(AICPA, adapted)



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  • CreatedOctober 25, 2014
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