Case 1.7 - Emilia Skupiewska Acct 723 Prof A Dignam Case...

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Acct. 723 Prof. A. Dignam Case 1.7 Lincoln Saving and Loan Associates Question 1 1. Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant and accurate picture of transactions and events". If an entity practices the 'substance over form' concept, the financial statements will show the financial reality of the entity (economic substance), rather than the legal form of transactions (form). It emphasizes the economic substance of an event even though its legal form may provide a different result. An auditor’s responsibility is to inform the audit partner and audit committee of the violation of this principle as well as document the violation in detail. After reviewing the clients financial data, auditor’s firm must decide whether to continue the engagement if the client does not adhere to GAAP. On the other hand if the “substance over form” concept is violated resulted in materially misstatements of financial statements, the adverse opinion would be adequate. Question 2 Sometimes to accept or do not accept the client is a big dilemma for the auditing firm especially when is the large client. In this type of case the auditing company should analyze the benefits and what company would suffer by losing such a client. What impact would this have on the firm and on theirs careers. When the large client holds relatively high audit risk could bring more challenging issues, which require more work and effort putting into engagement. In such a cases The auditor should evaluate if is worth for the company to keep such a client, even though it is a one of the largest client to the audit firm. According to Sarbanes – Oxley Act of 2002 and auditing standards, it is requested for audit firm to maintain independence. Acceptance high risk audit client to relatively high audit fees may cause to loose the independence by audit firm. Investors and creditors and other third party readers of financial statement may assume if organization is paying high fees related to market price, the data in financial statement may not be accurate and that auditing firm would work in favor of the client. Acceptance the high-risk audit client is subject to professional judgment. The audit firm should evaluate the work has to be done to maintain the independence and collect all date to provide the opinion about financial statements. Usually this type of client requires more hours of work and in most cases this would explain the high audit fee. In addition they have evaluate the economic profit from that audit over the reputation, could be damage by doing so. Therefore in the real world when one company would be able to accept this client, the other would not and this all depends on the priorities of the firm and its policies. Question 3
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Case 1.7 - Emilia Skupiewska Acct 723 Prof A Dignam Case...

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