Reference no: EM131059270

Introduction:

A well­executed audit provides value to a company by offering assurance on financials and other information. In this task, you will apply your knowledge of legal and ethical standards to analyze and detect fraud risk in a company and its 401(k) plan.

Scenario:

As a manager at a regional CPA firm, Freedom Rock Accounting (FRA), you are asked to provide an analysis of a potential client, Pure Grain Milling (PGM). PGM has requested a bid from FRA for auditing services for year 7.

The managing partner of FRA is concerned about potential legal issues and/or conflicts in the prospective PGM engagement.

PGM is a local firm that has grown from a small grain milling shop owned by three area farmers to a small public company. (See background information.) OFA, an accounting firm that merged with FRA last year, was PGM's bookkeeper from inception through year 4.

OFA did not have experience in IPOs, therefore, when PGM went public in year 5, the management hired a national public accounting firm to audit the financial statements. FRA continues to offer tax advice to PGM. You recognize that your firm's subsidiary, Freedom Rock Financial Services (FRFS), is the financial advisor who sold the client their 401(k) plan and continues to service as the registered representative of record to the plan.

In year 6, a director of FRFS left employment with FRFS to become the chief financial officer of PGM. The partner also wants to consider accepting the PGM 401(k) plan as an audit client. What potential legal and ethical issues should be considered before either engagement is accepted?

Requirements:
Note: All of the following prompts will require the use of the attached "Financial Statements" and "Background Information" documents along with additional external research in order to perform high­level analysis as needed to reach conclusions regarding the current­year audit of the company.

A. Develop an internal report (suggested length of 2-5 pages) addressed to the senior partner that discusses any potential legal or ethical issues regarding the PGM engagement by doing the following:

1. Identify three potential legal issues or conflicts associated with FRA's ability to audit PGM.

a. Discuss the rules in place that address these legal issues or conflicts.
2. Identify three potential legal issues or conflicts associated with FRA's ability to audit PGM's 401(k) plan.
a. Discuss the rules in place that address these legal issues or conflicts.

3. Identify the three potential ethical issues or conflicts associated with FRA's ability to audit PGM.
a. Discuss the rules in place that address these ethical issues or conflicts.

4. Identify the three potential ethical issues or conflicts associated with FRA's ability to audit PGM's 401(k) plan.
a. Discuss the rules in place that address these ethical issues or conflicts.
5. Identify two potential fraud risks within PGM or with PGM's 401(k) plan.
B. When you use sources, include all in­text citations and references in APA format.