Reference no: EM132915035

Questions -

Q1) Mason and Madison, CPAs, audited the financial statements of Jefferson Company that were included in Jefferson's annual report. Subsequently, Jefferson went bankrupt and the creditors of the company brought a lawsuit against Jefferson's management, board of directors, auditors (=Mason and Madison), and attorneys for the misstatements of the financial statements.

Assume that the jury in the case decides that responsibilities for the $1 million in losses should be allocated as follows:

Management: 70%; Board of Directors: 20%; Mason and Madison 5%; Attorneys 5%

1. Under what laws would the creditors initiate this lawsuit?

2. Assuming that all the defendant in the case are financially able to pay their share of the losses, calculate the amount of losses that would be allocated to Mason and Madison.

3. Assuming that management had no financial resources, describe how Mason and Madison's share of the losses change under Joint and Several Liability rule (You don't need to calculate the exact amount).

Q2) Three cases below are independent from one another.

1. Controls of the client company appear strong. Auditors tested the controls and found them to be strong and operate effectively.

2. Controls of the client company appear strong, but auditors decide not to test them.

3. Controls appear weak.

For each case:

a. Is the assessed level of control risk high or low?

b. Is the acceptable detection risk high or low?

c. Based on the acceptable detection risk, explain the scope (nature, timing, and extent) of substantive procedures to be performed.