For of the following situations, indicate whether it violates the AICPA's Code of Professional Conduct. If it violates the Code, indicate the rule is most directly violated and explain why. That is, I want you to select the rule that is most clearly violated by the specifics of the case. If you don't think it violations a rule, explain why as well. Use the rule numbers cited in the text and not paragraph numbers from the codification. In all cases you are a CPA and member of the AICPA.

You are a former partner for Sullivan and Peters, CPAs. You left that firm two years ago and to become the CFO for one of its financial services clients. While you worked for Sullivan and Peters, you were the only expert in the financial services industry. Therefore, Sullivan and Peters have maintained a relationship with you and occasionally pays you consulting fees to advise them on their financial service client audits.

You provide a variety of non-audit services to one of your audit clients to include bookkeeping and tax preparation. You also provide informal advice on tax planning issues for the client's management and sometimes attend their Board of Directors meetings. The client's CEO considers you one of the firm's major business advisors. The client is not publicly traded.

You have just completed your first audit of a new client. During the audit, you identified an area of their tax return that you believe could be handled differently that would result in a refund for the client. You offer to advise them on preparing a amended tax return and state that you will charge them 50% of any refund that they obtain by following your advice. The client accepts your offer.

You are working to build you client base of non-profit organizations for the CPA firm of which you are a partner. You take out an ad in a local newspaper where you claim that you audit 40% of the largest non-profit organizations in the region. You also state that your average fees when related to the size of the non-profits you audit is the lowest in the region.

Your annual audit of OPQ, Inc. had the following issues:

Even though OPQ had significant long-term debt, all of which were bank loans secured by various fixed assets and some of which included restrictive covenants, you decided not to confirm the debt with the banks that issued the debt. You had auditing the firm for years and their balance sheet listed the same loans as last year, just reduced by the amount of the principle they paid during the year. However, management didn't tell you that the firm had incurred a major new loan to compensate for a significant drop in its operating cash flows. Thus, you ended providing a clean opinion on a set of financial statements that materially understated long-term debt.

You were aware that all of the banks that had issued loans to OPQ in the past required audited financial statements as part of their loan approval process.

Shortly after you had issued your report, OPQ's cash flow problems continued to deteriorate. The tried to compensate in two ways. First, they took out another large bank loan from one of the banks that held other bank notes from the firm, using your audited financial statements as support for the loan. Second, they sold additional stock to raise additional capital. The used your audit financial statements in the prospectus they issued to support the new stock sale. OPQ's stock is publicly traded and subject to SEC regulation.

Approximately six months after OPQ executed both the new loan and the stock sale, they declared bankruptcy because their operating cash continued to deteriorate to the point they could no longer make the debt payments. Because of the bankruptcy, trading was suspended on OPQ's stock because its value had dropped by 98% and the banks could only recover 20% of the remaining balances on their loans.

Both the bank that had issued the new loan and several major stockholders that had purchased stock from the new offering sued you to recover their losses.

Answer the following questions and justify your answers with specific references to the appropriate laws and legal principles. Be thorough in covering all the issues concerning both if they bank will prevail.

Will the bank be successful in their law suit against you for:

ordinary negligence?

fraud?

Will the stockholders who purchased their stock in the stock offering for which OPQ used your audit financial statements succeed in against you under each of the following bodies of law?

Common Law

Federal securities law (be sure to indicate which statue)

Midterm Exam Fall 2015 ACCT 612 - Auditing Instructions After you have downloaded this document from the Midterm Exam Assignment, please save a copy of this document and rename it using your own name as the file name so that I can keep them separate on my machine (i.e., "Jim Peters Mid.doc"). Type all your answers in this document. Once you have completed the exam, submit your completed Word files by attaching them to the Midterm assignment in LEO by midnight, November 1st. I will assess a 5% per day late penalty for late exams. If you need clarification on the wording of any question on the exam, you can e-mail me or call me at the phone numbers listed in my contact information. I will not accept direct quotes in your answers. If you use outside sources, you need to paraphrase the material in your own words. I will deduct points for not following these instructions. For example, I will deduct points if you do not type your answers in this document and submit some other type of file; if you do not attached your file to the assignment; or if you do not rename your file as instructed above. I have posted a spreadsheet file, which I refer to as a grading checklist, with this exam. That spreadsheet file shows you how I have allocated points to questions. When grading your exams, I will fill in a copy of this file for each student and return it with your graded exam. When I grade exams, I embed comments in the Word documents to explain why I am deducting points. Course Policy on Collaboration and Individual Work This exam is an individual assignment. You are not to discuss it with anyone other than myself. It is also open book and open note. However, it is not a research assignment and I want you to base your answers to the questions on the material I have included in the exam, the text for the course, and the materials I have handed out in class. 1) For of the following situations, indicate whether it violates the AICPA's Code of Professional Conduct. If it violates the Code, indicate the rule is most directly violated and explain why. That is, I want you to select the rule that is most clearly violated by the specifics of the case. If you don't think it violations a rule, explain why as well. Use the rule numbers cited in the text and not paragraph numbers from the codification. In all cases you are a CPA and member of the AICPA. a You are a former partner for Sullivan and Peters, CPAs. You left that firm two years ago and to become the CFO for one of its financial services clients. While you worked for Sullivan and Peters, you were the only expert in the financial services industry. Therefore, Sullivan and Peters have maintained a relationship with you and 1 occasionally pays you consulting fees to advise them on their financial service client audits. 2) a) You provide a variety of non-audit services to one of your audit clients to include bookkeeping and tax preparation. You also provide informal advice on tax planning issues for the client's management and sometimes attend their Board of Directors meetings. The client's CEO considers you one of the firm's major business advisors. The client is not publicly traded. b) You have just completed your first audit of a new client. During the audit, you identified an area of their tax return that you believe could be handled differently that would result in a refund for the client. You offer to advise them on preparing a amended tax return and state that you will charge them 50% of any refund that they obtain by following your advice. The client accepts your offer. c) You are working to build you client base of non-profit organizations for the CPA firm of which you are a partner. You take out an ad in a local newspaper where you claim that you audit 40% of the largest non-profit organizations in the region. You also state that your average fees when related to the size of the non-profits you audit is the lowest in the region. Your annual audit of OPQ, Inc. had the following issues: E v e n t h o u g h O P Q h a d s 2 i g n i f i c a n t l o n g t e r m d e b t, a ll o f w h i c h w e r e b a n k l o a n s 3 s e c u r e d b y v a r i o u s f i x e d a s s e t s a n d s o m e o f w h i c h i n c l u 4 d e d r e s t r i c ti v e c o v e n a n t s , y o u d e c i d e d n o t t o c o n f i r m 5 t h e d e b t w it h t h e b a n k s t h a t i s s u e d t h e d e b t. Y o u h a d a u d it i 6 n g t h e f i r m f o r y e a r s a n d t h e i r b a l a n c e s h e e t li s t e d t h e 7 s a m e l o a n s a s l a s t y e a r, j u s t r e d u c e d b y t h e a m o u n t o f t h e 8 p r i n c i p l e t h e y p a i d d u r i n g t h e y e a r. H o w e v e r, m a n a g e m e n 9 t d i d n 't t e ll y o u t h a t t h e f i r m h a d i n c u r r e d a m a j o r n e w l 10 o a n t o c o m p e n s a t e f o r a s i g n i f i c a n t d r o p i n it s o p e r a ti n g 11 c a s h f l o w s . T h u s , y o u e n d e d p r o v i d i n g a c l e a n o p i n i o n o 12 n a s e t o f f i n a n c i a l s t a t e m e n t s t h a t m a t e r i a ll y u n d e r s t 13 a t e d l o n g t e r m d e b t. 14 Y o u w e r e a w a r e t h a t a ll o f t h e b a n k s t h a t h a d i s s u e d l o a n s t o O P Q i n t h e p a s t r e q u i r e d a u d it e 15 d f i n a n c i a l s t a t e m e n t s a s p a r t o f t h e i r l o a n a p p r o v a l p 16 r o c e s s . 17 S h o r tl y a f t e r y o u h a d i s s u e d y o u r r e p o r t, O P Q 's c a s h f l o w p r o b l e m s c o n ti n u e d t o d e t e r i o r a t e . T h e t r i e d t 18 o c o m p e n s a t e i n t w o w a y s . F i r s t, t h e y t o o k o u t a n o t h e r l a 19 r g e b a n k l o a n f r o m o n e o f t h e b a n k s t h a t h e l d o t h e r b a n k 20 n o t e s f r o m t h e f i r m , u s i n g y o u r a u d it e d f i n a n c i a l s t a t 21 e m e n t s a s s u p p o r t f o r t h e l o a n . S e c o n d , t h e y s o l d a d d it i 22 o n a l s t o c k t o r a i s e a d d it i o n a l c a p it a l. T h e u s e d y o u r a u d it 23 f i n a n c i a l s t a t e m e n t s i n t h e p r o s p e c t u s t h e y i s s u e d t o 24 s u p p o r t t h e n e w s t o c k s a l e . O P Q 's s t o c k i s p u b li c l y t r a d 25 e d a n d s u b j e c t t o S E C r e g u l a ti o n . 26 A p p r o x i m a t e l y s i x m o n t h s a f t e r O P Q e x e c u t e d b o t h t h e n e w l o a n a n d t h e s t o c 27 k s a l e , t h e y d e c l a r e d b a n k r u p t c y b e c a u s e t h e i r o p e r a ti 28 n g c a s h c o n ti n u e d t o d e t e r i o r a t e t o t h e p o i n t t h e y c o u l d 29 n o l o n g e r m a k e t h e d e b t p a y m e n t s . B e c a u s e o f t h e b a n k r u 30 p t c y , t r a d i n g w a s s u s p e n d e d o n O P Q 's s t o c k b e c a u s e it s v a 31 l u e h a d d r o p p e d b y 9 8 % a n d t h e b a n k s c o u l d o n l y r e c o v e r 32 2 0 % o f t h e r e m a i n i n g b a l a n c e s o n t h e i r l o a n s . 33 B o t h t h e b a n k t h a t h a d i s s u e d t h e n e w l o a n a n d s e v e r a l m a j o r s t o 34 c k h o l d e r s t h a t h a d p u r c h a s e d s t o c k f r o m t h e n e w o f f e 35 r i n g s u e d y o u t o r e c o v e r t h e i r l o s s e s . Answer the following questions and justify your answers with specific references to the appropriate laws and legal principles. Be thorough in covering all the issues concerning both if they bank will prevail. b Will the bank be successful in their law suit against you for: i) ordinary negligence? ii) fraud? 36 b) Will the stockholders who purchased their stock in the stock offering for which OPQ used your audit financial statements succeed in against you under each of the following bodies of law? i) Common Law ii) Federal securities law (be sure to indicate which statue) 37