Required
Identify and discuss any breaches, if any, to the principles and rules of the code of professional conduct in the following independent scenarios. Explain.
(a) Susanne, a professional accountant, has agreed to audit the financial statements of a newly formed biotechnology company that is publicly traded. The company has an immaterial amount of revenues and mostly incurs research and development costs, which results in a fairly simple set of financial statements. Accordingly, Susanne charges the client a very low audit fee of $7,000 for the first year, since she expects to make a substantial amount of money in preparing the personal tax returns of the company's key executives for 2012.
(b) Aziz, a professional accountant and a partner in a public accounting firm, is discussing the audit plan for his client, a private entity. The company's unaudited financial statements show exceptional revenue growth and earnings this year, and Aziz is concerned that management may be manipulating the financial statements in anticipation of a future public offering. Accordingly, Aziz tells the senior auditor to contact him immediately if she uncovers any evidence of deliberate fraud because Aziz does not want his firm to be associated with clients who lack integrity and may resign from the engagement.
(c) Mandip, a professional accountant, has been engaged to compile the quarterly financial statements for his new client, a private company that develops and markets computer software. The owners employ a part-time bookkeeper to maintain basic accounting records but rely on Mandip to put all the information in proper form each quarter.
The statements consist of a balance sheet, income statement, and statement of cash flows, but no footnotes or other disclosures. The owners use the quarterly statements to help them manage the company. Because the company has limited resources, Mandip's fees for his services are paid in company shares. Mandip has agreed to this unusual arrangement since he knows that the owners plan a public offering of shares within the next few years, and he will then be able to sell the shares. Finally, to obtain a better knowledge of the company's operations and to make sure that the reported dollar amounts are plausible, Mandip performs a thorough ratio analysis of the compiled statements each quarter and discusses any unusual findings with management.