AC 410 All Assignments AC 410 All Assignments | Page 4

Required:
If management and the board of directors take appropriate remedial
action, should Barber be required to report the matter outside the
company?
Describe Barber's appropriate response if management and the board
of directors fail to take appropriate remedial action.
3-43
Thomas Gilbert and Susan Bradley formed a professional corporation
called “Financial Services Inc.—A Professional Corporation,” each taking
50 percent of the authorized common stock. Gilbert is a CPA and a
member of the AICPA. Bradley is a CPCU (Chartered Property Casualty
Underwriter). The corporation performs auditing and tax services under
Gilbert's direction and insurance services under Bradley's supervision.
One of the corporation's first audit clients was Grandtime Company.
Grandtime had total assets of $600,000 and total liabilities of $270,000.
In the course of his examination, Gilbert found that Grandtime's
building with a carrying value of $240,000 was pledged as collateral for
a 10-year term note in the amount of $200,000. The client's financial
statements did not mention that the building was pledged as collateral
for the 10-year term note. However, as the failure to disclose the lien
did not affect either the value of the assets or the amount of the
liabilities, and his examination was satisfactory in all other respects,
Gilbert rendered an unqualified opinion on Grandtime's financial
statements. About two months after the date of his opinion, Gilbert
learned that an insurance company was planning to loan Grandtime
$150,000 in the form of a first-mortgage note on the building. Realizing