CASE STUDY

1. State whether the action or situation shows a violation of the AICPA Code of Professional Conduct; if so, explain why and cite the relevant rule or interpretation.

A. CPA Jerry Cheese became the new auditor for Python Insurance Company. Cheese knew a great deal about insurance accounting but had never conducted an audit of an insurance company. Consequently, Cheese hired CPA Tate Gilliam, who had six years of experience with the State Department of Insurance Audit. Gilliam managed the audit and Cheese was the partner in charge.

B. CPA Mackenzie Palin practices public accounting and is a director of Comedy Company. Palins firm performs consulting and tax services for Comedy. Palin prepared unaudited financial statements on Comedys letterhead and submitted them to First National Bank in support of a loan application. Palins accounting firm received a fee for this service.

C. CPA Ellery Idle audited the financial statements of Monty Corporation and gave an unmodified report. Monty is not a public company, so the financial statements did not contain the SEC-required reconciliation of deferred income taxes.

D. CPA Gwyn Chapman audited the financial statement of BTV Ltd. These financial statements contain capitalized leases that do not meet FASB criteria for capitalization. They resemble more closely the criteria for operating leases. The effect is material, adding $4 million to assets and $3.5 million to liabilities. However, BTV has a long experience with acquiring such property as its own assets after the lease terms end. Chapman and BTV management believe the financial statements should reflect the operating policy of the management instead of the technical requirements of the FASB. Consequently, the auditors report explains the accounting and gives an unmodified opinion.