engagement to audit the annual financial statements

1. On August 20,2013, Bella Andres, CPA and partner, was offered and accepted the engagement to audit the annual financial statements of Japee Corporation for the fiscal and calendar years ended December 31, 2018. The audit began on September 15,2018, and ended on March 7, 2019. Japee Corporation is regulated by the SEC. Bella served as controller of Japee Corporation from November 5, 20014 until January 10, 2018, at which time she terminated her employment with Japee. Bella owned a material amount of Japee Corporation’s common stock from November 5, 2004 until August 15, 2018, at which time she sold the stock. Violation of Codes of Ethics? Why?

2. Tan and Canada, a firm of certified public accountants, audited the accounts of Sterling Skins, Inc., a corporation that imports and deals in fine furs. Upon completion of the examination, the auditors supplied Sterling Skins with twenty copies of the certified statement of financial statement. The firm knew in a general way that Sterling wanted that number of copies of the auditor’s report to furnish to banks and other potential lenders.
   
   The statement of financial position I question was in error by approximately P800,000. Instead of having a P600,000 net worth, the corporation was insolvent. The management of Sterling Skins had doctored the books to avoid bankruptcy. The assets had been overstated by P500,000 of fictitious and nonexisting accounts receivable and P300,000 of nonexisting skins listed as inventory when in fact Sterling Skins had only empty boxes. The audit failed to detect these fraudulent entries. JC, relying on the certified statement of financial position loaned Sterling Skins P200,000. They seek to recover their loss from Tan and Canada.
   
   Required:
   State whether each of the following is true or false and give your reasons:
   
   a. If JC alleges and proves negligence on the part of Tan and Canada he will be able to recover his loss.
   
   b. If JC alleges and proves constructive fraud (that is, gross negligence on the part of Tan and Canada) he will be able to recover his loss.
   
   c. JC does not have a contract with Tan and Canada.
   
   d. Unless actual fraud on the part of Tan and Canada could be shown, JC could not recover.
   
   e. JC is a third-party beneficiary of the contract Tan and Canada made with Sterling Skins.

3. Rain Tan recently joined the CPA firm of Base, Umapas & Canada. She quickly established a reputation for thoroughness and a steadfast dedication to following prescribed auditing procedures to the letter. On her third audit for the firm, Tan examined the underlying documentation of two hundred disbursements as a test of purchasing, receiving vouchers payable, and cash disbursement procedures. In the process, they found twelve disbursements for the purchase of materials that had no receiving reports documentation. She noted the exceptions in the working papers and called them to the attention of the in-charge accountant. Relying on prior experience with the client, the in-charge accountant disregard Tan’s comments. Nothing further was done about the exceptions.

Subsequently, it was learned that one of the client’s purchasing agents and a member of its accounting department were engaged in a fraudulent scheme to divert the receipt of materials to a public warehouse while sending the invoices to the client. When the client discovered the fraud, the conspirators had diverted approximately P70,000 in materials, P50,000 of it after the completion of the audit.

Required:

1. Discuss the legal implications and liabilities to Base, Umapas & Cañada as a result of these facts.
2. Discuss the legal implications and liabilities to Base, Umapas & Cañada if the CPA firm is a limited liability partnership.

4. Alice Borromeo, a partner in the CPA firm of Jay and Dee, received the following memorandum from Jenny Gomez, president of Gomez Manufacturing Corporation, an audit client of many years.

Dear Alice:

I have a new type of engagement for you. You are familiar with how much time and money we have been spending in installing equipment to eliminate the air and water pollution caused by our manufacturing plant. We have changed our production process to reduce discharge of gases; we have changed to more expensive fuel sources with less pollution potential; and we have discontinued some products because we couldn’t produce them without causing considerable pollution.

I don’t think the stockholders and the public are aware of the efforts we have made, and I want to inform them of our accomplishments in avoiding danger to the environment. We will devote a major part of our annual report to this topic, stressing that our company is the leader of the entire industry in combating pollution. To make this publicity more convincing, I would like to retain your firm to study what we have done and to attest as independent accountants that our operations are the nest in the industry as far as preventing pollution is concerned.

To justify your statement, you are welcome to investigate every aspect of our operations as fully as you wish. We will pay for your services at your regular audit rates and will publish your “pollution opinion” in our annual report to stockholders immediately following some pictures and discussion of our special equipment and processes for preventing industrial pollution. We may put this section of the annual report in a separate cover and distribute it free to the public. Please let me know at once if this engagement is acceptable to you.

Sincerely,

Jenny Gomez

Required:

Put yourself in Alice’s position and write a reply to this client’s request. Indicate clearly whether you are willing to accept the engagement and explain your attitude toward this proposed extension of the auditor’s attest function.

5. Various organizations develop standards for audits and regulate CPA firms. Compare and contrast the roles of PICPA, the SEC, and the Boards of Accountancy along the following dimensions: a. Standard setting, b. Regulation of CPA firms, c. Source of Authority.