Professional Standards Case

Please use the AICPA Professional Standards to answer each of the following questions. Please cite the section of the professional standards where you found your answer. You may not cite other sources (e.g. a text book or other on-line sources).

1. What topic does AU-C 315.33 address?

2. Michael Smithson, Michelle Roberts, and Chris Cooper all received their MAcc degrees from MTSU. All three worked for large, international CPA firms before they came together to create their own CPA firm call Smithson, Roberts and Cooper, LLP. After practicing for about ten years, Michael Smithson was tragically killed in an automobile accident. Michelle Roberts and Chris Cooper plan to continue operating the CPA firm, but they are uncertain whether they must remove Smithson from the name of the CPA firm since Mr. Smithson is no longer working at the firm. Is it permissible to keep Smithson in the name of the firm? (Refer to the Code of Professional Conduct)

3. You are auditing the accounts receivable of Raider Manufacturing, Inc., a private company. You selected 40 accounts that you plan to confirm using positive confirmations. When you presented the list to the client, they asked you to specifically not confirm three of these accounts. What should you do?

4. You were recently reading an article in the Journal of Accountancy about audit sampling, and the article keeps referring to the sampling unit. You want to know what this term means so you start searching the professional standards. What is the formal definition of this term? (Use the clarified auditing standards to find your answer.)

5. Smith Brothers Distributing, Inc., a private company, requested that your firm perform a compilation of their financial statements. You agreed to perform the engagement, but now you have substantial doubt about their ability to continue as a going concern for a reasonable period of time. What are your responsibilities? (Use the Accounting and Review Standards (AR) to answer this question.)

Example question and answer:

Example: Smith, CPA is auditing MT Outfitters for the year ending December 31, 2015. Comparative financial statements will be issued, and the audit report will cover both 2014 and 2015. (Smith audited MT for 2014 and issued an unmodified report.) The current CEO of MT Outfitters was hired on November 1, 2015. He refuses to sign the management representation letter which includes representations related to the 2014 and 2015 financial statements because he was not employed at the company during 2014. He states he does not have adequate knowledge to make representations regarding the 2014 financial statements. He is willing to sign representations related to the 2015 financial statements, but not the 2014 financial statements. Would this be appropriate? Can the auditor allow it?

Answer:

Source: AU-C 580.A26

This would not be appropriate. The auditing standards require management to sign the representations letter for all periods presented. Specifically, AU-C 580.A26 states: Situations may arise in which current management was not present during all periods referred to in the auditors report. Such persons may assert that they are not in a position to provide some or all of the written representations because they were not in place during the period. This fact, however, does not diminish such persons responsibilities for the financial statements as a whole. Accordingly, the requirement for the auditor to request from them written representations that cover the whole of the relevant period(s) still applies.