Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan.

Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. He has recommended the same budget for this client as his last grocery store client. To save time, he provided his assistants with a copy of the audit program for Happy Time Food Stores, a previous client he worked on. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working.

After beginning their work, the assistants told Alan that the audit program did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit program and don't add anything - it will only make us go over the budget." When Alan came to the client near the end of field Work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit program had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager.

Required:

a. Refer to the description of the AICPA principles underlying an audit in Figure 2-2 (Page 35) in the text, or class notes or your understanding of the basic auditing standards.Describe any 2 waysin which these standards were violated in the situations above. Be specific - say what the standard was, and how it was violated - (if the situation was about traffic laws, I would expect you to say: The laws says you have to stop at a red light, and this driver kept going. Don't just say they went straight without saying there was a law about stopping....)

Figure 2-2

Purpose of an Audit

Provide an opinion about the financial

statements

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Responsibilities

Possess appropriate competence and

capabilities

Comply with ethical requirements

Maintain professional skepticism and

exercise professional judgment

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Performance

Obtain reasonable assurance about

whether financial statements are free

of material misstatement

Plan work and supervise assistants

Determine and apply materiality level

or levels

Identify and assess risks of material

misstatement based on understanding

of entity and its environment,

including internal controls

Obtain sufficient appropriate audit

evidence

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Reporting

Express opinion on financial statements

in a written report

Whether financial statements are

presented fairly in accordance with

financial reporting framework