Question

Aaron, CPA, accepted an engagement to audit the financial statements of Eastern Corporation., a new client. In the course of conducting the audit and applying proper audit procedures, Aaron discovered that financial statements may be materially misstated due to the existence of fraud. Required:

(a) Describe Aaron's responsibilities for reporting on Eastern’s financial statements and other communications if Aaron is precluded from applying necessary procedures in searching for frauds.

(b) Describe Aaron's responsibilities for reporting on Eastern's financial statements and other communications if Aaron concludes that Eastern's financial statements are materially affected by frauds.

Answer 1

A.    If Aaron is precluded from applying necessary procedures, Aaron should disclaim or qualify an opinion on the financial statements and communicate these findings to Eastern's audit committee or its board of directors.

B. If Aaron concludes that Eastern's financial statements are materially affected by frauds, Aaron should insist that the financial statements be revised and, if they are not, express a qualified or an adverse opinion on the financial statements, disclosing all the substantive reasons for such an opinion. Additionally, Aaron should adequately inform Eastern's audit committee or its board of directors about the frauds.