Solution manual auditing and assurance services 13e by arens chapter 05

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Only Barbara can decide. One reasonable approach
is for Barbara to start by discussing the matter further with
Jack. She should listen carefully to his reasoning and express
her reservations about throwing the schedules away. She
should not subordinate her judgment to Jack, as this would
be a violation of Rule of Conduct 102. If Jack satisfies her
that it is acceptable to throw the schedules away (this seems
unlikely in the circumstances), then she may be justified in
doing so. However, if she still has reservations, she should
inform Jack that she intends to contact a manager or partner.

Practitioners voluntarily agree to abide by the Code as they enter
public practice. It is imperative that individuals at least comply with
the minimum standards specified by the Code of Professional
Conduct, despite pressures one may face. Concealing a known
material misstatement in a client's financial statements is clearly a
violation of a practitioner's responsibility to society.
Bob Smith in essence condoned Oake's behavior by doing nothing.
His inaction is worthy of sanction by his firm, the AICPA, and the
state Board of Accountancy.
At a minimum, practitioners must draw the line by complying with
the Rules of Conduct specified in the Code of Professional
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5-29 (continued)
Conduct. Violations of the Code are not acceptable. Hopefully,
most practitioners strive to uphold the ethical principles specified in

the Code of Professional Conduct.
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a. Peter acts unethically.
He should comply with the HKICPA
Statements of Professional Ethics/Code of Ethics for Professional
Accountants. It is inappropriate to provide unethical advice to John
Caine to record those personal expenses through the add value
transactions of the Octopus card
b. The amount being added to the Octopus card is not an expense
transaction, but merely a switch of money from paper money to
electronic one. Recording the add value operations as expenses will
lead to overstatement of expenses. Therefore, you should inform the
client that they are presenting incorrect information in their financial
statements and should request your client to make adjustments. In
case the client refuses to correct and the amount involved is material,
you should withhold the audit report or withdraw from the audit
engagement.
Internet Problem Solution: PCAOB Disciplinary Actions
5-1
The Sarbanes-Oxley Act granted the Public Company Accounting Oversight
Board (PCAOB) investigative and disciplinary power over auditors of public
companies. During the course of conducting inspections of auditing firms, the
PCAOB may become aware of certain behaviors or other matters that may lead
to an investigation. Such was the case, when the PCAOB contacted Goldstein
and Morris to inform the firm that it would begin an inspection in November 2004.
Shortly after being notified of the impending inspection, the firm’s managing
partner along with two other partners determined to conceal certain information from
the PCAOB. Visit the PCAOB’s website [ />Disciplinary_Proceedings/index.aspx] to learn about the disciplinary proceedings
against the firm and the partners involved in this case and then answer the
following questions. You should read two sets of proceedings, one related to the

firm of Goldstein and Morris CPAs, P.C. and the other related to Goldberger and
Postelnik.
1.

What specific client-related matters prompted Goldstein and Morris’s
decision to conceal certain information from the PCAOB?
Answer:
From October 2003 to July 2004, Goldstein and Morris CPAs, P.C.
prepared financial statements for two entities, RTG and NYFW,
which it also audited during the same period. After being notified
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that the PCAOB was requesting certain information related to the
audits of these entities, the firm’s managing partner and two other
partners engaged in efforts to conceal the nature of the services
provided to RTG and NYFW. In addition, the partners recognized
that there were certain deficiencies in the audit documentation
related to the audits of RTG and NYFW which were covered up by
creating documentation and back-dating so that it would appear as
though the documentation had been created during the audit.
2.

What sanctions were imposed on the firm, the managing partner,
and the two other partners involved in the investigation? Were
these sanctions fair?

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Internet Problem 5-1 (continued)
Answer:
The PCAOB revoked the registration of Goldstein and Morris CPAs,
P.C. and barred the managing partner, Edward Morris, from being
associated with a registered firm in the future. The two remaining
partners, Alan Goldberger and William Postelnik, received censures
from the PCAOB because they voluntarily disclosed their misdeeds
to the PCAOB completely and in a timely fashion before the PCAOB
relied upon the false information. Were the sanctions fair? Student
answers will vary, but their responses should discuss the voluntary
nature of the two partners’ confessions and the potential implications
of providing false information to the PCAOB.

(Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions may change. Current
information on Internet problems is available at www.pearsonglobaleditions.com/arens).

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