Name:

Unit 2
Question Requiring Analysis 3-31
Be sure to check out the requirements of the Private Securities Reform Act of
1995 to see how each scenario should be handled.
Part A: If management takes appropriate action to remedy the illegal actions
Barber CPA should report based on the situation. Rule 301 stresses the
confidential nature of information obtained by CPAs from their clients.
(Whittington, 2012) But in instance of illegal activities he should have duty if
the situation has a material effect on the financial statements. The private
securities and Reform act of 1995 includes a requirement for fraud
reporting, or whistleblowing, by the auditors. The requirements of this law
apply when the client has committed an illegal act and (a) it has a material
effect on the financial statements. (Whittington, 2012) Barber should still
take measures to inform management and board of directors of the findings
if findings are not material.

Part B: If findings of illegal activities are not addressed by management and

the board of directors Barber does have a legal duty to report the findings. If
auditors do find actions of illegal activity management has one day, where
management of the client must send a notification to the Securities and
Exchange Commission. (Whittington, 2012) If not the auditor has a duty to
report directly to the SEC. In instances where the auditor believes the
company management is completely corrupt auditors will resign and a Form
8-K, which discloses the reasons for the auditors resignation. (Whittington,
2012) Overall it is in the best interest of the auditor to consult legal advice as
well during such an instance were illegal intentions are involved.

Problem 3-43
Rule
Number
102
201

How did Gilbert violate this rule specifically?

Gilbert failed to correct financial statements to disclose the
original loan
Gilbert did not exercise due professional care when
providing professional services by not changing the

203
301

misleading information in the financial statements or

allowed others to sign off on such statements.
Gilbert should not issue an opinion if statements do not
comply with GAAP or found to be misleading.
Gilbert Violated the confidentiality for the client by
involving a partner outside the scope of the audit.

Questions Requiring Analysis 4-21

Be sure to think about contributory negligence.
Your Answer: Under contributory negligence the auditor is not liable for the
client loss if they are not the sole cause of the incident. In this incident it has
been years in the making and the auditors did provide solutions to internal
controls that could fix the problems. If management refused to make the
necessary changes to fix any issues they may have they are at fault in the
incident. In jurisdictions (e.g., states) that follow pure contributory
negligence doctrines, the auditors may entirely eliminate their liability to the
client by establishing the defense of contributory negligence by the client.
(Whittington, 2012)

Questions Requiring Analysis 4-26

Think about what Andersen was found guilty of.
Part A:
In this case Anderson was charged with a felony accused Arthur Andersen of
the wholesale destruction of documents relating to the Enron Corporation
collapse. (Whittington, 2012) With this mass destruction of documents it
lead for information to be incomplete and misleading.
What changes were made to our profession as a result of this case?
Part B: As a change to our profession we can see how the results of few can
harm an entire company such as Arthur Anderson. Changes that follow are
stronger regulations and stronger internal controls implemented by Sarbanes
and Oxley. If managers were aware of what was going on they could have put
a stop to fraudulent issues.

References
Whittington, R. (2012). Principles of Auditing & Other Assurance Services, 18th
edition. New York, NY: McGraw-Hill Irwin.