Reference no: EM13341841

John Clinton, owner of Clinton Company, applied for a bank loan and was informed by the banker that audited financial statements of the business had to be submitted before the bank could consider the loan application. Clinton then retained Arthur Jones, CPA, to perform an audit. Clinton informed Jones that audited financial statements were required by the bank and that the audit must be completed within three weeks. Clinton also promised to pay Jones a fixed fee plus a bonus if the bank approved the loan. Jones agreed and accepted the engagement.

The first step taken by Jones was to hire two accounting students to conduct the audit. He spent several hours telling them exactly what to do. Jones told the students not to spend time reviewing controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Clinton Company's financial statements. The students followed Jone's instructions and after two weeks gave Jones the financial statements, which did not include any notes. Jones reviewed the statements and prepared an unqualified audit report. The report, however, did not refer to generally accepted accounting principles.

Required:

List on the left side of a sheet of paper the generally accepted auditing standards that were violated by Jones, and indicate how the actions of Jones resulted in a failure to comply with each standard. Organize your answers as follows:

Generally Accepted Auditing Standards	Actions by Jones Resulting in Failure to Comply with Generally Accepted Auditing Standards
General Standards
(1) The auditor must have adequate technical training and proficiency to perform the audit.	(1) It was inappropriate for Jones to hire the two students to conduct the audit. The audit must be conducted by person with proper education and experience in the field of auditing. Although  a junior assistant has not

Analytical Procedures

In a 2- page paper, complete the case below and submit to instructor. Review the income statement for Uden Supply Company and answer the following:

• Describe the purpose of analytical procedures performed in the planning stage of the audit.
• Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden's operating performance in years 2001 - 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.
• Uden's unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4.
• Indicate whether you belive that the difference calculated in part (c) is material. Explain your answer.

Comparative income statement information for Uden Supply Company is presented in the accompanying table.

UDEN SUPPLY COMPANY

Comparative Income Statement

Years Ended December 20X1, 20X2, and 20X3

(Thousands)