This indicates that competent evidential matter was not obtained to provide an opinion of the financial statements.
Following GAAS, the report shall state whether the financial statements are presented in accordance with GAAP. Holmes report of Ray's financial statements did not mention if GAAP were being followed or state which applications of principles were being used.
The audit report should identify circumstances in which principles have not been consistently observed in the current period in relation to the preceding period. Since Holmes audit report did not mention anything about GAAP or include footnotes, an observer of the audit report would not know what applications were being applied.
Another auditing standard states that informative disclosure in the financial staments is to be regarded as reasonably adequate unless otherwise stated in the report. The two students did not include footnotes in the report they conducted. Ray's financial statements should include footnotes as to which applications of principles he uses in his business, and to settle any questions a user of the financial statements may have.
Lastly, the auditing report should contain an opinion regarding the financial statement, or state a reason why an expression of an opinion can not be given. The problem states that Holmes prepared an unqualified auditor's report. It did not mention anything about the CPA expressing an opinion about Ray's financial statements. As previously described, Holmes did not follow any of the GAAS while conducting an audit of Ray's business.
2-44.
Rule 503: Busy receiving a referral fee from Able is in violation of the AICPA's code. The code sates that any member who accepts a referral fee for recommending or referring any service of a CPA to any person shall disclose such acceptance or payment to the client. In this situation, neither Busy nor Able tells the client of the referral fee.
