The following are five independent situations. 1. Joanie Brogan is a partner in an audit firm...
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The following are five independent situations. 1. Joanie Brogan is a partner in an audit firm that operates as a limited liability part- nership (LLP). The firm has been sued for an alleged audit failure related to an audit engagement handled by a different partner in the firm. While Brogan had no involve. ment in the engagement, she is concerned that the plaintiff may successfully sue her seeking restitution from her personal assets. 2. A lawsuit has been filed against Carter Hockaday, CPA, charging him with construc- tive fraud in the audit of Broughton Company's financial statements. Hockaday has examined all the audit documentation in his files and reviewed all relevant auditing standards. He is convinced that his audit fully complies with standards of the profes sion but is uncertain what he should use as his primary defense tactic. 3. West Camera Co. filed for bankruptcy in January 2018. A recent blog suggested that West's external auditors should be sued for failing to include a going concern explan- atory paragraph in the firm's opinion on the financial statements issued before the bankruptcy, even though the fair presentation of the financial statements is not being disputed. 4. The audit firm Weaver and Jones, LLP, received a subpoena for its documentation related to the audit of Westbrook Corporation's financial statements. The firm has refused to respond, alleging that the documentation is considered privileged com- munication between the firm and its client. 5. Spencer Cullen, CPA, is a defendant in a lawsuit alleging that Cullen should be held legally liable for gross negligence for a fraud involving the valuation of securities in- cluded in the financial statements of one of his clients. Cullen was uncertain how to establish a correct valuation for the securities and decided to rely on the price estima- tion supplied by management. quired 5-23 (OBJECTIVES 5-5, 5-6) In order to expand its operations, Gibson Corp. raised $5 million in a public offering of common stock, and also negotiated a $2 million loan from Citizens National Bank. In connection with this financing, Gibson engaged Horton & Co., CPAS, to audit Gibson's financial statements. Horton knew that the sole purpose of the audit was so that Gibson would have audited financial statements to provide to Citizens National Bank and the purchasers of the common stock. Although Horton conducted the audit in confor mity with its audit program, Horton failed to detect material acts of embezzlement com- mitted by Gibson Corp.'s president. Horton did not detect the embezzlement because of its inadvertent failure to exercise due care in designing the audit program for this engagement. After completing the engagement, Horton issued an unqualified opinion on Barton's financial statements. The financial statements were relied upon by the purchasers of the common stock in deciding to purchase the shares. In addition, Citizens National Bank approved the loan to Gibson based on the audited financial statements. Within 60 days after the sale of the common stock and the issuance of the loan, Gibson was involuntarily petitioned into bankruptcy. Because of the president's embezzlement, Gibson became insolvent and defaulted on the loan from the bank. Its common stock became virtually worthless. Actions have been brought against Horton by the purchasers of the common stock, who have asserted that Horton is liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. • Citizens National Bank, based upon Horton's negligence. • trade creditors who extended credit to Gibson based upon Horton's negligence. a. Discuss whether you believe Horton will be found liable to the purchasers of com- mon stock. b. Indicate whether you believe Citizens National Bank will be successful in its claim d. Thompson is a Regal Jewelry.* against Horton. c. Indicate whether you believe the trade creditors will be successful in their claim against Horton." 5-24 (OBJECTIVE 5-6) Under Section 116-1 101 The following are five independent situations. 1. Joanie Brogan is a partner in an audit firm that operates as a limited liability part- nership (LLP). The firm has been sued for an alleged audit failure related to an audit engagement handled by a different partner in the firm. While Brogan had no involve. ment in the engagement, she is concerned that the plaintiff may successfully sue her seeking restitution from her personal assets. 2. A lawsuit has been filed against Carter Hockaday, CPA, charging him with construc- tive fraud in the audit of Broughton Company's financial statements. Hockaday has examined all the audit documentation in his files and reviewed all relevant auditing standards. He is convinced that his audit fully complies with standards of the profes sion but is uncertain what he should use as his primary defense tactic. 3. West Camera Co. filed for bankruptcy in January 2018. A recent blog suggested that West's external auditors should be sued for failing to include a going concern explan- atory paragraph in the firm's opinion on the financial statements issued before the bankruptcy, even though the fair presentation of the financial statements is not being disputed. 4. The audit firm Weaver and Jones, LLP, received a subpoena for its documentation related to the audit of Westbrook Corporation's financial statements. The firm has refused to respond, alleging that the documentation is considered privileged com- munication between the firm and its client. 5. Spencer Cullen, CPA, is a defendant in a lawsuit alleging that Cullen should be held legally liable for gross negligence for a fraud involving the valuation of securities in- cluded in the financial statements of one of his clients. Cullen was uncertain how to establish a correct valuation for the securities and decided to rely on the price estima- tion supplied by management. quired 5-23 (OBJECTIVES 5-5, 5-6) In order to expand its operations, Gibson Corp. raised $5 million in a public offering of common stock, and also negotiated a $2 million loan from Citizens National Bank. In connection with this financing, Gibson engaged Horton & Co., CPAS, to audit Gibson's financial statements. Horton knew that the sole purpose of the audit was so that Gibson would have audited financial statements to provide to Citizens National Bank and the purchasers of the common stock. Although Horton conducted the audit in confor mity with its audit program, Horton failed to detect material acts of embezzlement com- mitted by Gibson Corp.'s president. Horton did not detect the embezzlement because of its inadvertent failure to exercise due care in designing the audit program for this engagement. After completing the engagement, Horton issued an unqualified opinion on Barton's financial statements. The financial statements were relied upon by the purchasers of the common stock in deciding to purchase the shares. In addition, Citizens National Bank approved the loan to Gibson based on the audited financial statements. Within 60 days after the sale of the common stock and the issuance of the loan, Gibson was involuntarily petitioned into bankruptcy. Because of the president's embezzlement, Gibson became insolvent and defaulted on the loan from the bank. Its common stock became virtually worthless. Actions have been brought against Horton by the purchasers of the common stock, who have asserted that Horton is liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. • Citizens National Bank, based upon Horton's negligence. • trade creditors who extended credit to Gibson based upon Horton's negligence. a. Discuss whether you believe Horton will be found liable to the purchasers of com- mon stock. b. Indicate whether you believe Citizens National Bank will be successful in its claim d. Thompson is a Regal Jewelry.* against Horton. c. Indicate whether you believe the trade creditors will be successful in their claim against Horton." 5-24 (OBJECTIVE 5-6) Under Section 116-1 101
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a Discuss whether you believe Horton will be found liable to the purch asers of com mon stock ANS WER It is possible that Horton could be found liable to the purch asers of the common stock based on a ... View the full answer
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Auditing a business risk appraoch
ISBN: 978-0324375589
6th Edition
Authors: larry e. rittenberg, bradley j. schwieger, karla m. johnston
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