John Clinton, owner of Clinton Company, applied for a bank loan and was informed by the banker that audited financial statements of the business h ad 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 spend 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 Jones'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.
Statndards of reporting #4:
The report on an engagement to evaluate subject matter that has been prepared based on agreed-upom criteria or an assertion related thereto, or on and engagement to apply agreed-upon procedures, should contain a statement restricting its use to the parties who have agreed upon such criteria or procedures.
Actions by Jones Resulting in Failure to Comply with Generally Accepted Auditing Standards based on the above paragraph!