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Case Analysis - FS Audit

Joe Ramos, a recent accounting graduate and CPA, had previously maintained the accounting records for Red Company as a part-time job while in college. After two years of working for an audit firm, Ramos prepared Red Company's annual financial statements as his final work for them before leaving. Red Company then asked Ramos to issue an audit report on the financial statements to help secure a bank loan, since Ramos knew the company's affairs and prepared the statements. However, [1] Ramos cannot justify issuing an audit report without first performing an audit according to professional standards. [2] If Ramos did perform an audit, his prior relationship with Red Company would jeopardize his independence.

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Roschele Lizardo
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68 views2 pages

Case Analysis - FS Audit

Joe Ramos, a recent accounting graduate and CPA, had previously maintained the accounting records for Red Company as a part-time job while in college. After two years of working for an audit firm, Ramos prepared Red Company's annual financial statements as his final work for them before leaving. Red Company then asked Ramos to issue an audit report on the financial statements to help secure a bank loan, since Ramos knew the company's affairs and prepared the statements. However, [1] Ramos cannot justify issuing an audit report without first performing an audit according to professional standards. [2] If Ramos did perform an audit, his prior relationship with Red Company would jeopardize his independence.

Uploaded by

Roschele Lizardo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Case Analysis

FINANCIAL STATEMENTS AUDIT

Name: OWL Section: BSA-3A

Case/Situational Analysis (For 15 points)

Joe Ramos a college student majoring in accounting, helped finance his education with a part-
time job maintaining all accounting records for a small business, Red Company, located near
campus. Upon graduation, Ramos passed the CPA examination and joined the audit staff of a CPA
firm.
However, he continued to perform all accounting work for Red Company during his “leisure time.”
Two years later, Ramos received his CPA certificate and decided to give up his part-time work
with Red Company. He noticed Red that he would no longer be available after preparing the year-
end financial statements.

On January 7, Ramos delivered the annual financial statements as his final act for Red Company.
The owner then made the following request: "Joe, I am applying for a substantial bank loan, and
the bank loan officer insists upon getting audited financial statements to support my loan
application. You are now a CPA, and you know everything that's happened in this company and
everything that's included in these financial statements, and you know they give a fair picture. I
would appreciate it if you would write out the standard audit report and attach it to the financial
statements. Then I'll be able to get some fast action on my loan application."

Requirements:

1. Would Ramos be justified in complying with Red's request for an auditor's opinion?
Explain.

No, Even though Ramos is a CPA, he can’t just justifies Red‘s request. The
preparation of financial statements is cannot be interpreted as synonymous with
the auditing statements. Also, he’s not audited the financial statements with the
accordance of GAAP. Ramos relationship with Red’s company is questionable, he
could maintain the “Independence” of mental attitude if he did the financial
statements.

2. If you think Ramos should issue the audit report, do you think he should first perform an
audit of the company despite his detailed knowledge of the company's affair? Explain.

Yes, if he will issue a standard audit report on the financial statement of Red’s
company, he should first complete the audit of financial statements. The auditors
does not express an opinion on financial statements without performing first an
audit.

3. If Red had requested an audit by the national CPA firm for which Ramos worked, would it
have been reasonable for that firm to accept and to assign Ramos to perform the audit?
Explain.
No, it wouldn’t be reasonable for that firm, Ramos prepared the financial
statement, and if he will also audit it this will cause independence which he will
evaluate the product of his own work. Independence of mental attitude in the
assessing own work is extremely doubtful.

- END -

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