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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 that the insurance company was unaware of
the existing lien on the building, Gilbert had Bradley notify the
insurance company of the fact that Grandtime's building was pledged
as collateral for a term note.
Shortly after the events described above, Gilbert was charged with
several violations of professional ethics.
Required:
Identify and discuss at least four ethical implications of those acts by
Gilbert that were in violation of the AICPA Code of Professional
Conduct.
4-21
Jensen, Inc., filed suit against a public accounting firm, alleging that
the auditors' negligence was responsible for failure to disclose a large
defalcation that had been in process for several years. The public
accounting firm responded that it may have been negligent, but that
Jensen, Inc., was really to blame because it had completely ignored
the public accounting firm's repeated recommendations for
improvements in internal control.
Required:
If the public accounting firm was negligent, is it responsible for the
loss sustained by the client? Does the failure by Jensen, Inc., to follow