AC 410 Unit 2 Homework Assignment

AC 410 Unit 2 Homework Assignment
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homework-assignment
3-31
Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a
publicly held company. During the course of the audit, Barber
discovered that DGF has been making illegal bribes to foreign
government officials to obtain business, and he reported the matter to
senior management and the board of directors of DGF.
Required:
If management and the board of directors take appropriate remedial
action, should Barber be required to report the matter outside the
company?
Describe Barber's appropriate response if management and the board
of directors fail to take appropriate remedial action.
3-43
Thomas Gilbert and Susan Bradley formed a professional corporation
called “Financial Services Inc.—A Professional Corporation,” each taking

50 percent of the authorized common stock. Gilbert is a CPA and a
member of the AICPA. Bradley is a CPCU (Chartered Property Casualty
Underwriter). The corporation performs auditing and tax services under
Gilbert's direction and insurance services under Bradley's supervision.
One of the corporation's first audit clients was Grandtime Company.
Grandtime had total assets of $600,000 and total liabilities of $270,000.
In the course of his examination, Gilbert found that Grandtime's
building with a carrying value of $240,000 was pledged as collateral for
a 10-year term note in the amount of $200,000. The client's financial
statements did not mention that the building was pledged as collateral
for the 10-year term note. However, as the failure to disclose the lien
did not affect either the value of the assets or the amount of the
liabilities, and his examination was satisfactory in all other respects,
Gilbert rendered an unqualified opinion on Grandtime's financial
statements. About two months after the date of his opinion, Gilbert
learned that an insurance company was planning to loan Grandtime
$150,000 in the form of a first-mortgage note on the building. Realizing
that the insurance company was unaware of the existing lien on the
building, Gilbert had Bradley notify the insurance company of the fact
that Grandtime's building was pledged as collateral for a term note.
Shortly after the events described above, Gilbert was charged with
several violations of professional ethics.
Required:
Identify and discuss at least four ethical implications of those acts by
Gilbert that were in violation of the AICPA Code of Professional
Conduct.

4-21
Jensen, Inc., filed suit against a public accounting firm, alleging that the
auditors' negligence was responsible for failure to disclose a large
defalcation that had been in process for several years. The public
accounting firm responded that it may have been negligent, but that
Jensen, Inc., was really to blame because it had completely ignored the
public accounting firm's repeated recommendations for improvements
in internal control.
Required:
If the public accounting firm was negligent, is it responsible for the loss
sustained by the client? Does the failure by Jensen, Inc., to follow the
auditors' recommendation for better internal control have any bearing
on the question of liability? Explain.
4-26
The international CPA firm of Arthur Andersen faced significant liability
in conjunction with its audits of Enron Corporation.
Required:
From a legal liability perspective, describe the unique features of this
audit case.
Describe the important implications of this audit case for a firm of
public accountants.