Several years ago. Dale Holden organized Holden Restaurants. Holden started with one small restaurant, but over time the restaurant became quite popular due largely to the quality of the food and service, an attractive yet modest atmosphere, and reasonable prices.

Success with his first restaurant encouraged Holden to open at least one new restaurant in each of the last five years, resulting today in eight successful restaurants located in metropolitan areas throughout the state. Owing to recent rapid expansion of the business, Holden has hired a controller and supporting staff to manage the individual restaurants, allowing Holden to focus attention on the aggregate operations and to plan future expansion.

Holden has applied to a bank for additional financing to open another restaurant this year. For the first time ever, the bank asked him to provide financial statements audited by an independent auditor. The bank assured Holden that the audited statements were not required because they doubted his integrity or thought him to be a poor credit risk. Rather, bank policy required all businesses over a certain size to supply audited statements with loan applications, and Holden's business had long since reached that size.

Holden was not surprised by the bank's requirement. He'd ruled out an audit previously because he trusts his controller's integrity and, besides, he wanted to avoid the fee associated with an initial audit as long as possible. However, his absence from everyday hands-on operations now make an audit advisable since, trust aside, he also believes an additional benefit of the audit will be the probable detection of any fraud that may have occurred at his restaurants.

To fulfill the bank's request for audited financial statements. Dale Holden has hired Hill & Associates, CPAs.

Required:

1. Discuss Hill & Associates' responsibilities to detect fraud in a financial statement audit.

2. What effect, if any, would the detection of fraud by Hill & Associates have on their opinion on the financial statements?