Brown received a telephone call from Calhoun, the sole owner and manager of a small company, asking

Question:

Brown received a telephone call from Calhoun, the sole owner and manager of a small company, asking Brown to prepare financial statements for the company. Calhoun told Brown that the statements were needed in two weeks, but was vague when Brown asked about the intended use of the statements. Brown was convinced that Calhoun thought Brown's work would constitute an audit. To avoid confusion. Brown decided not to explain to Calhoun that the engagement would be to prepare the financial statements only. Brown understood that a substantial fee would be paid if the work were completed in two weeks, accepted the engagement, and started work at once.

Brown discovered an accrued expense account labeled "Professional Fees" and learned that the balance in the account represented an accrual for the cost of Brown's services. Brown suggested to Calhoun's bookkeeper that the account name be changed to "Fees for Limited Audit Engagement." Brown also reviewed several invoices to determine whether accounts were being classified properly. Some invoices were missing.

Brown listed the missing invoice numbers in the working papers with a note indicating that they should be followed up during the next engagement. Brown also discovered that fixed assets were carried at estimated current replacement costs. Based on available records. Brown prepared a balance sheet, income statement, and statement of shareholders' equity. In addition. Brown drafted the notes but decided that any mention of the replacement costs would only mislead the readers. Brown suggested to Calhoun that readers of the financial statements would be better informed if they received a separate letter from Calhoun explaining the meaning and effect of the estimated replacement costs of the fixed assets. Brown mailed the financial statements to Calhoun with the following note included on each page:

The accompanying financial statements are submitted to you unthout complete audit verification.

Required:

Identify the inappropriate actions of Brown and indicate what Brown should have done to avoid each inappropriate action. Structure your response as follows: