Reference no: EM133097388
Question - Jack Russel owned a small hardware store. Jack made the decision that he wanted to expand his store, but he needed a loan from his bank. Sadie Smith, CPA, had just opened her accounting firm not too far away from the hardware store. Sadie and Jack met one day at Jack's store when she was looking for some hooks to hang up pictures in her new office. After exchanging some light banter with Sadie, Jack asked her if she could audit his financial statements so that he could get a bank loan that he needed.
Without too much hesitation, Sadie agreed. Sadie asked a few key questions and determined that she would be able to provide the report within 30 days. Jack's offer was too good to pass, so he offered Sadie a small percentage of the loan if he received the money from the bank, as well as her usual fee.
Because timing was of the essence, Sadie went to a nearby business college and hired two students who had recently graduated. Knowing that the procedures would be new to these graduates, she took considerable time explaining the processes to them. Sadie told the graduates to focus on making sure the calculations were accurate, and to forgo the checks on internal controls. The emphasis, she told them, was proving the journal and subsidiary ledger entries to ensure that they reflected the financial statements accurately.
The two graduates completed the work in about 10 days and handed Sadie the report; however, there were no footnotes. Sadie reviewed the reports and prepared her unqualified auditor's report. In her report, there was no mention of GAAP principles, no procedures were outlined, and there was no verification of the previous years' statements.
You will now describe the generally accepted auditing principles.
Evaluate and explain each principle that was violated in the agreement between Jack and Sadie.
Determine if Sadie or the graduates violated any of the generally accepted auditing principles.
Identify and outline the steps that should have been taken in this case.