In each of the following, identify which of
the elements of the fundamental principles is most applicable. In addition, discuss what
action(s) (if any) you believe auditors should take with respect to these issues.
a. An entity has contacted you about performing its audit engagement. You have not previously
served a client in the entity’s industry, which has many industry-specific accounting
issues that are both technical and complex.
b. An entity has entered into a number of lease agreements. Based on the requirements of
GAAP, you believe that these obligations meet the criteria for being classified as capital
leases; however, the entity has elected to treat these leases as operating leases, providing
full and complete disclosure of this treatment in the footnotes to the financial statements.
c. Because of a disagreement with its current auditors, an entity has contacted you about
conducting its current-year audit. However, because the previous auditors have just
recently resigned from the engagement, you have some questions as to whether an audit
can be completed in time to meet the entity’s deadlines for providing audited financial
statements to a lender.
d. Based on the effectiveness of the entity’s internal control, you have assessed control
risk at low levels and decided that a smaller number of customer accounts need to be
e. An entity has contacted you about performing its audit engagement. This entity became
aware of your firm because the husband of one of your partners is currently serving as the
entity’s chief financial officer.
f. One of your clients is currently a potential defendant in several cases because of the damage
caused by one of its products. Because this entity does not believe that it is likely to
receive an unfavorable outcome from this litigation, it did not disclose the potential litigation
in the footnotes accompanying their financial statements.
g. You are performing tests of the client’s controls over the processing of revenue transactions
to determine whether these controls are operating effectively and can be relied upon
to prevent or detect misstatements.
h. One of your supervisors has requested a number of clarifications based on her review of
your work on an audit engagement. A subsequent meeting with her has resolved these
clarifications, and you both have concluded that your work supports the opinion on the
client’s financial statements.