Problem:

John Clinton, owner of Clinton Company, applied for a bank loan and was informed by the banker that audited financial statements of the business had to be submitted before the bank could consider the loan application. Clinton then retained Arthur Jones, CPA, to perform an audit. Clinton informed Jones that audited financial statements were required by the bank and that the audit must be completed within three weeks. Clinton also promised to pay Jones a fixed fee plus a bonus if the bank approved the loan. Jones agreed and accepted the engagement.

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The first step taken by Jones was to hire two accounting students to conduct the audit. He spent several hours telling them exactly what to do. Jones told the students not to spend time reviewing controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Clinton Company