Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company's records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditor's report within three weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing internal controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that supported Ray's financial statements. The students followed Holmes's instructions and after two weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unmodified auditor's report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles Brief description of principle Holmes action failure to comply with principles Answer a and vii a. The auditor must possess the competency and capabilities to perform the audit b The auditor must be at least 21 years of age. C. c The auditor must comply with ethical requirements which include maintaining independence in mental attitude in all matters relating to the audit. d. The auditor must maintain professional skepticism and exercise professional judgment in the performance of the audit and the preparation of the report e. The auditor must adequately plan the work and must properly supervise any assistants. f. The auditor must identify and assess the risks of material misstatemeat based on a sufficient understanding of the entity and its environment, including its internal control, to design the nature, timing, and extent of furber audit procedures 9 The quality control partner must test the quality control procedures at least annually to ensure the firm is in compliance h. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit i. Because of the financial interest in whether the bank loan is granted to Ray, Holmes is independent in neither fact nor appearance with respect to the assignment undertaken il Holmes acquired no evidence that would support the financial statements. Holmes merely checked the mathematical accuracy of the records and summarized the accounts. Standard audit procedures and techniques were not performed ii. Maintaining professional skepticism and exercising professional judgment require critical review at every level of supervision of the work done and the judgments exercised by those assisting in the audit. Holmes did not review the work or the judgments of the assistants iv. Although Holmes' report contains an expression of opinion, such opinion is not based on the results of a proper audit. Holmes should disclaim an opinion because he failed to conduct an audit in accordance with auditing standards V. Holmes accepted the engagement without considering the availability of competent staff. In addition, Holmes failed to supervise the assistants VI Homes did not perform in excess of 50% of the detailed audit work. As such, the audit was not properly staffed. The auditor must express an opinion in a written report about whether the financial statements are presented in accordance with the applicable financial reporting framework j. The audit partner must perform most (in excess of 50's) of the detailed audit work. k. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report. I. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons in the auditors report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report. m. The auditor must assess whether the financial statements are presented in accordance with the financial reporting framework