Bartel and James formed a corporation called Financial Magic Services, Inc. In the corporation, Stan Bartel is a CPA (audits and tax services) and Morgan James is a casualty insurance underwriter. Bartel accepted an audit engagement with Ralston Company. Ralston had total assets of $750,000 and total liabilities of $275,000.During the audit, Bartel found that Ralston’s building with a book value of $300,000 was pledged as collateral for a 10-year note amounting to $225,000. The client did not mention the lien, but Bartel found that the values of all other financial statements were satisfactory, so he issued an unqualified opinion. About 60 days after the audit, Bartel learned that an insurance company, who was unaware of the lien, was planning to loan $175,000 in the form of a first mortgage on the building. Bartel talked to James, a CPCU (Chartered Property Casualty Underwriter), who agreed to notify the insurance company.

Required:
What does this situation suggest about important ethical and professional issues that may relate to auditing client debt?