January 31 2015
ACC 411 W.A. 2
a. What defense should Lauren Yost and Co. use in the suit by Stuart? Contributory negligence appears to be the best defense against Stuart. The president personally verified the procedure of counting inventory on different days at different locations and thus signed off on the method. This could’ve hide the overstatement of inventory from the auditor. Also, Yost had no influence over this internal control weakness. b. What defense should Lauren Yost and Co. use in the suit by First City National Bank? Using the no negligence performance as defense would be the ideal option for Yost. The overstated inventory was not discovered therefore not Yost’s fault and she conducted the audit in accordance with auditing standards. Also, she’s not responsible for the misstated information under this defense. . c. Is Yost likely to be successful in her defenses?
Yost can win her case with these defenses as long as she can prove the inventory was overstated by the company. For her to require the president to sign off on the debated method of counting inventory as it can possibly be used as evidence. Yost was not the only one counting inventory, there was one other person in the CPA firm at each site to an audit procedure. d. Would the issues or outcome be significantly different if the suit was brought under the Securities Exchange Act of 1934? There’s no issue under with Yost under 1934 act. The issues and outcomes should be essentially the same under the suit brought under the Securities Exchange Act of 1934. If the suit were brought under Rule 10b-5, it is certainly unlikely that the plaintiff (Yost) would be successful, in as much as there was no intent to deceive. The plaintiff would likely be unsuccessful in such a suit.
19. Will the CPA firm be liable to the creditors who extended the money because of their reliance on the erroneous financial statements if Newell Corporation should fail to pay them? Under Section 10 and Rule 10B-5 of the Securities Exchange Act of 1934, the CPA firm is definitely liable. Small purposely conducted a fraudulent audit to avoid being fired. The bank believed in the information giving from Newell. A CPA firm will not be liable to third parties with whom it has neither dealt nor for whose benefit its work was performed. One notable exception to this rule is fraud. When the financial statements were fraudulently prepared, liability runs to all third parties who relied upon the false information contained in them. Fraud can be either actual or constructive. With this scenario, there was no actual fraud on the part of Small or the firm in that there was no deliberate falsehood made with the requisite intent to deceive. However, it would appear that constructive fraud might be present. Constructive fraud is found where the auditor's performance is found to be grossly negligent. That is, the auditor really had either no basis or so flimsy a basis for his or her opinion that he or she has manifested a reckless disregard for the truth. Small's disregard for standard auditing procedures would seem to indicate such gross negligence and, the firm is liable to third parties who relied on the financial statements and suffered a loss as a result.
a. What are the purposes of the two parts of the report of management? The two parts establish and explain the extent of management’s responsibilities within the organization, specifically with financial statements and internal controls.
b. What is the auditor’s responsibility related to the report of management? Management certifies the financial statements are in compliance with accounting principles. An auditor’s responsibility is to fully examine the validity of this statement by searching for any and all material misstatements.
a. Explain the differences among management assertions about classes of transactions and events,...
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