ACCT 322 – Auditing 1 Fall 2020, Group Case Assignment 2 Group Case Assignment 2, Due November 6 before the beginning of class

ACCT 322 – Auditing 1 Fall 2020, Group Case Assignment 2

Group Case Assignment 2, Due November 6 before the beginning of class. Bring a paper version to the class.

Format: Times New Roman 12 point font, double spaced, minimum of one inch margins. NOTE that single spaced assignments will be returned ungraded as there is no space to write comments. Be aware of academic honesty rules. Any material that is not your own should be appropriately cited and/or quoted.

(20 marks worth 5% of your grade)

Question #1 (12 marks)

Prestige International contacted the CPA firm of Teitel & Deiana to perform an audit of their financial statements. In arranging for the audit, Prestige International clearly indicated that  they were obtaining an audit report to satisfy Marathon Bank as to the corporation’s sound financial condition and to obtain an additional loan of $450,000 (it had previously obtained a $300,000 loan).  Teitel & Deiana accepted the engagement, performed the examination without due care, and rendered an unqualified opinion. If an adequate examination had been performed, the financial statements would have been found to be misleading and required an adjustment or have a different opinion rendered by the auditor.

Prestige International submitted the audited financial statements to Marathon Bank and obtained an additional loan of $450,000.  Marathon Bank refused to lend more than that amount after being requested to by Prestige International. After several other banks also refused to loan them money, Prestige International finally was able to persuade The People’s Bank to lend the additional $250,000. The People’s Bank relied upon the financial statements examined by Teitel & Deiana.

Prestige International is now in bankruptcy, and the Marathon Bank seeks to collect from Teitel & Deiana the $750,000 it loaned Prestige International. The People’s Bank seeks to recover from Teitel & Deiana the $250,000 it loaned Prestige International.

Required:

1. Will the Marathon Bank be able to recover from Teitel & Deiana? Explain in detail using the legal liability model (7 marks)

2. Will the People’s Bank be able to recover from Teitel & Deiana? Explain in detail using the legal liability model. (5 marks)

ACCT 322 – Auditing 1 Fall 2020, Group Case Assignment 2 – Page 2 of 2

Question 2 (8 marks)

For each of the following independent situations, state whether the CPA has violated generally accepted auditing standards and/or the CPA-Canada Code of Ethical Principles and Rules of Conduct or Independence Standard AND explain your reasoning.

1. Susan, a CPA, is engaged to review the financial statements of a client company. A major shareholder of the company is a mutual fund of which Susan owns shares. Her investment in the mutual fund is not material relative to her total investment portfolio. On completion of the engagement, Susan issues a standard review report, modified only to indicate her lack of independence from the client. (2 marks)

2. Yang, CGA, was approached by a potential small business client who asked him if he could compile the company’s financial statements from the initial transaction records, making whatever adjustments he considered necessary to produce financial statements that could be filed with the company’s tax returns. Yang accepted the engagement and prepared a balance sheet and income statement, without notes, to which he appended an unmodified "Notice to Reader."  (2 marks)

3. Jacob, CGA, has recently taken out an advertisement in the local newspaper in which he offers to conduct reviews of GST and provincial sales taxes for companies for which he will be compensated only by a percentage of the recoveries of overpaid taxes. He also offers to review personal and corporate income tax returns and assessments on the same basis (that is, his compensation will be contingent on the recoveries of taxes paid or assessed). (2 marks)

4. Mathew, a CGA, primarily prepares audits of private companies. He regularly attends meetings with his assurance clients and creditors to discuss the audited financial statements, ratios, and other covenant calculations. Mathew attends these meetings as a passive participant and his discussion with the creditors is limited to factual information only. (2 marks)