Ray, the owner of a small company, asked Holmes, a CPA, to conduct
an audit of the company’s records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditor’s report within three weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.
Holmes hired two accounting students to conduct the audit and spent several hours
telling them exactly what to do. Holmes told the students not to spend time reviewing
internal controls but instead to concentrate on proving the mathematical accuracy of
the ledger accounts and summarizing the data in the accounting records that supported Ray’s financial statements. The students followed Holmes’s instructions and after two weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unmodified auditor’s report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles.
Briefly describe each of the principles underlying AICPA auditing standards and indi-
cate how the action(s) of Holmes resulted in a failure to comply with each principle.
Organize your answer as follows:
