ASSIGNMENT
4-29 (OBJECTIVE 4-8) Visit the PCAOB’s website (www.pcaobus.org) and locate the PCAOB’s
Settled Disciplinary Order against David M. Burns issued on December 19, 2017, to answer the following questions:
a. What position did Burns hold within the audit firm and how long had he served in
that position?
b. What audit client was related to this Disciplinary Order?
c. What are the main PCAOB accusations of Burns’ failures in relation to the audit?
d. How were the client’s financial statements impacted by his inappropriate actions?
e. What penalties did the PCAOB impose on Burns?
Research
CASES
4-30 (OBJECTIVES 4-5, 4-7) The following are situations that may violate the AICPA Code of
Professional Conduct. Assume, in each case, that the CPA is a partner, unless stated otherwise.
1. Elbert is a staff accountant at a CPA firm. Elbert’s wife works in human resources at
one of the clients audited by Elbert’s firm, although Elbert is not on the audit engage-
ment. As part of an employee stock ownership program at her company, Elbert’s wife
receives shares of stock in her company.
2. Contel, CPA, advertises in the local paper that his firm does the audit of 14 of the 36
largest community banks in the state. The advertisement also states that the average
audit fee, as a percentage of total assets for the banks he audits, is lower than any other
CPA firm’s in the state.
3. Baker, CPA, approaches a new audit client and tells the president that he has an idea
that could result in a substantial tax refund in the prior year’s tax return by appli-
cation of a technical provision in the tax law that the client had overlooked. Baker
adds that the fee will be 50 percent of the tax refund after it has been resolved by the
Internal Revenue Service. The client agrees to the proposal.
4. Jon Davis is a former partner at Davis, Harrison, Smith. He left the firm to work for
an audit client of DHS. Since Davis was the only expert in the firm on not-for-profit
clients, DHS pays him as a consultant when they have questions related to their not-
for-profit audit engagements.
5. Able, CPA, owns a substantial limited partnership interest in an apartment building.
Frederick Marshall is a 100 percent owner in Marshall Marine Co. Marshall also owns
a substantial interest in the same limited partnership as Able. Able does the audit of
Marshall Marine Co.
6. Finigan, CPA, does the audit, tax return, bookkeeping, and management services work
for Gilligan Construction Company. Mildred Gilligan follows the practice of calling
Finigan before she makes any major business decision to determine the effect on her
company’s taxes and the financial statements. Finigan attends continuing education
courses in the construction industry to make sure that she is technically competent
and knowledgeable about the industry. Finigan normally attends board of directors
meetings and accompanies Gilligan when she is seeking loans. Mildred Gilligan often
jokingly introduces Finigan with this statement, “I have my three business partners—
my banker, the government, and my CPA, but Finny’s the only one that is on my side.”
Discuss whether the facts in any of the situations indicate violations of the AICPA Code of
Professional Conduct. If so, identify the nature of the violation(s).
4-31 (OBJECTIVES 4-2, 4-7) Barbara Whitley had great expectations about her future as she
sat in her graduation ceremony in May 2018. She was about to receive her Master of
Required
THE AUDITING PROFESSION
Accounting degree, and in the next week she would begin her career on the audit staff of
Green, Thresher & Co., CPAs.
Things looked a little different to Barbara in February 2019. She was working on the
audit of Delancey Fabrics, a textile manufacturer with a calendar year-end. The pressure was
enormous. Everyone on the audit team was putting in 70-hour weeks, and it still looked as if
the audit wouldn’t be done on time. Barbara was doing work in the property area, vouching
additions for the year. The audit program indicated that a sample of all items over $20,000
should be selected, plus a judgmental sample of smaller items. When Barbara went to take
the sample, Jack Bean, the senior, had left the client’s office and couldn’t answer her ques-
tions about the appropriate size of the judgmental sample. Barbara forged ahead with her
own judgment and selected 50 smaller items. Her basis for doing this was that there were
about 250 such items, so 50 was a reasonably good proportion of such additions.
Barbara audited the additions with the following results: The items over $20,000 contained
no misstatements; however, the 50 small items contained a large number of misstatements. In
fact, when Barbara projected them to all such additions, the amount seemed quite significant.
A couple of days later, Jack Bean returned to the client’s office. Barbara brought her work
to Jack in order to apprise him of the problems she found and got the following response:
“Gosh, Barbara, why did you do this? You were only supposed to look at the items
over $20,000 plus 5 or 10 little ones. You’ve wasted a whole day on that work, and we can’t
afford to spend any more time on it. I want you to throw away the schedules where you
tested the last 40 small items and forget you ever did them.”
When Barbara asked about the possible audit adjustment regarding the small items,
none of which arose from the first 10 items, Jack responded, “Don’t worry, it’s not material
anyway. You just forget it; it’s my concern, not yours.”
a. In what way is this an ethical dilemma for Barbara?
b. Use the six-step approach discussed in this chapter to resolve the ethical dilemma.
