Refer to the Professional Judgment in Context feature "Deficiencies in Auditing Debt Obligations and Stockholders' Equity Accounts: Insights from SEC Releases" and review the panel related to Federico Quinto, Jr., CPA. Answer the following questions:
a. What risks of material misstatement were present in the case?
b. What are the auditor's responsibilities related to debt covenants? What would you consider to be the most relevant assertions related to debt covenants, and what substantive procedures should the auditor have performed?
c. Identify ways in which the audit team appeared to have a lack of appropriate professional skepticism.
d. Assume that you were part of the audit team for the Soyo Group 2007 audit and you were aware that the appropriate disclosures related to debt covenants had not been made in the financial statements. Use the framework for ethical decision making presented in Chapter 4 to determine the actions you should take. Recall that the steps are as follows:
(1) Identify the ethical issue,
(2) Determine the affected parties and identify their rights,
(3) Determine the most important rights,
(4) Develop alternative courses of action,
(5) Determine the likely consequences of each proposed course of action,
(6) Assess the possible consequences,
(7) Decide on an appropriate course of action.