Question

The SEC issued Accounting and Auditing Enforcement Release (AAER) No. 2393 on March 8, 2006. The Enforcement Release related to the matter of Michael B.
Johnson and Michael Johnson & Co. and concerns the audits of Winners. The following facts about Johnson and Co.'s audit of Winners are included in the AAER:
● Johnson, age 56, is a resident of Littleton, Colorado. Johnson has been the manager and sole member of Johnson&Co. and a licensed certified public accountant in Colorado since 1975. He also is a licensed certified public accountant in Florida andMississippi.
● Johnson & Co. is an accounting firm located in Denver, Colorado.
Johnson is the only member of, and the only certified public accountant affiliated with, the firm.
● Johnson & Co., through the participation of Johnson, audited the financial statements of Winners Internet Network, Inc.
(Winners) for the years ended December 31, 1997 and 1998.
Johnson supervised the audits and compilations of these financial statements and signed the audit reports for the 1997 and 1998 audits on behalf of Johnson & Co.
● Winners' December 31, 1999, financial statements were prepared and audited by Johnson and Johnson & Co.
● Johnson & Co. issued audit reports accompanying Winners'
year-end financial statements for 1997 and 1998 that contained a going-concern modification and an unqualified audit report for 1999. These financial statements contained material misstatements, some of which related to entries made by Johnson or under the direction of Johnson. These reports falsely stated that the financial statements were presented fairly in all material respects in conformity with GAAP and that the audits of these financial statements were conducted in accordance with GAAS. These statements were false, since portions of the underlying financial statements were not presented in conformity with GAAP, which, in turn, rendered false the statements that the audits were conducted in accordance with GAAS, since the failure to address a deviation from GAAP in an audit report is a violation of GAAS.
a. Given the nature of Johnson & Co.'s work on Winners' financial statements for 1997-1999, what type of audit opinion should have been issued?
b. In considering this decision, answer the following questions by completing the first four steps of the seven-step framework for professional decision making introduced in Chapter 4:
1. What difficulties might Johnson have faced when deciding what type of opinion to issue? Why might Johnson have not issued the appropriate opinions?
2. What are the consequences of Johnson's decisions in this case?
3. What are the risks and uncertainties associated with this decision?
4. In deciding on whether to issue a going-concern modification, what types of evidence should the auditor gather to evaluate the reasonableness of the going-concern assumption?
Recall that the framework is as follows:


Source: Adapted from “Judgment and Choice,” by RobinHogarth.


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