Audit evidence must be sufficient and competent.To be competent, the evidence must be both valid and relevant.

Required:

1. What is meant by "sufficient audit evidence?"
2. Define the concepts of validity and relevance as theyrelate to audit evidence.

An auditor is sued for negligence by the stockholders of an audit client.The auditor had issued an unqualified opinion on the client's financial statements.It was later determined that the statements were materially distorted due to errors and fraud.

Required:

1. Under what conditions, in common law may an auditor be held liable to third parties for negligence?
2. Describe two approaches for differentiating between ordinary negligence and gross negligence.Cite examples to support your approaches.
3. Who will prevail in the present case?

John Block, CPA, has been approached by a prospective new audit client, Snappy Enterprises, Inc.Snappy had previously been audited by another CPA.Before acceptingthe engagement, Block discussed several matters with Snappy's controller and (with Snappy's permission) the other CPA.As a result of these discussions, the following information was obtained.

Incorporated in 1992, Snappy's primary business is buying, developing, selling, and leasing commercial real estate.Apartment complexes, shopping malls, and industrial parks make up the major portion of the company's business.Starting out in Albuquerque, New Mexico and the surrounding area, Snappy gradually expanded its operations to include most of southwestern United States, including the Phoenix--Scottsdale--Mesa area of Arizona.

After two years of losses, the company reported its firstearnings in 1994.From 1995 to 2000, revenues and earnings increased dramatically.Earnings for 2001 and 2002, howeverdeclined from earlier levels. For the current year, 2003, unaudited net income has rebounded to the 2000 level.

Block has learned from discussions with Snappy's controller that, as of 12/31/03, the end of the current year, the company was in the process of completing a major mall project.The company currently owns several apartment complexes and leases its completed shopping malls to numerous retail establishments.After having been developed, industrial properties are sold either to municipalities or to companies locating in the complexes.

In discussing past audits with the CPA formerly engaged by Snappy, Block learned that several disagreements had arisen over the years, many of which had not been resolved to the satisfaction of the former auditors.The disagreements related to accounting matters as well as to the substance of certain transactions with lessees.

Required:

1. In deciding whether to accept this engagement, what factors should Block consider?
2. If he decides to accept the engagement, in what areas should he concentrate his audit resources?