ACCOUNTING C244 – ADVANCED AUDITING Competency 3031.1.1

Task 1 ADVANCED AUDITING Competency 3031.1.1: Professional Ethics and Legal Liability – The graduate applies legal and ethical professional standards in a business environment to perform a variety of assurance activities. Competency 3031.1.4: Fraud Detection – The graduate applies appropriate auditing procedures to detect fraud. Introduction: A well-executed audit provides value to a company by offering assurance on financials and other information. In this task, you will apply your knowledge of legal and ethical standards to analyze and detect fraud risk in a company and its 401(k) plan. Scenario: As a manager at a regional CPA firm, Freedom Rock Accounting (FRA), you are asked to provide an analysis of a potential client, Pure Grain Milling (PGM). PGM has requested a bid from FRA for auditing services for year 7. The managing partner of FRA is concerned about potential legal issues and/or conflicts in the prospective PGM engagement. PGM is a local firm that has grown from a small grain milling shop owned by three area farmers to a small public company. (See background information.) OFA, an accounting firm that merged with FRA last year, was PGM’s bookkeeper from inception through year 4. OFA did not have experience in IPOs, therefore, when PGM went public in year 5, the management hired a national public accounting firm to audit the financial statements. FRA continues to offer tax advice to PGM. You recognize that your firm’s subsidiary, Freedom Rock Financial Services (FRFS), is the financial advisor who sold the client their 401(k) plan and continues to service as the registered representative of record to the plan. In year 6, a director of FRFS left employment with FRFS to become the chief financial officer of PGM. The partner also wants to consider accepting the PGM 401(k) plan as an audit client. What potential legal and ethical issues should be considered before either engagement is accepted? Requirements: Note: All of the following prompts will require the use of the attached “Financial Statements” and “Background Information” documents along with additional external research in order to perform high-level analysis as needed to reach conclusions regarding the current-year audit of the company. A. Develop an internal report (suggested length of 2–5 pages) addressed to the senior partner that discusses any potential legal or ethical issues regarding the PGM engagement by doing the following: 1. Identify three potential legal issues or conflicts associated with FRA’s ability to audit PGM. a. Discuss the rules in place that address these legal issues or conflicts. 2. Identify three potential legal issues or conflicts associated with FRA’s ability to audit PGM’s 401(k) plan. a. Discuss the rules in place that address these legal issues or conflicts. 3. Identify the three potential ethical issues or conflicts associated with FRA’s ability to audit PGM. a. Discuss the rules in place that address these ethical issues or conflicts. 4. Identify the three potential ethical issues or conflicts associated with FRA’s ability to audit PGM’s 401(k) plan. a. Discuss the rules in place that address these ethical issues or conflicts. 5. Identify two potential fraud risks within PGM or with PGM’s 401(k) plan. B. When you use sources, include all in-text citations and references in APA format. Note: For definitions of terms commonly used in the rubric, see the Rubric Terms web link included in the Evaluation Procedures section. Note: When using sources to support ideas and elements in an assessment, the submission MUST include APA formatted in-text citations with a corresponding reference list for any direct quotes or paraphrasing. It is not necessary to list sources that were consulted if they have not been quoted or paraphrased in the text of the assessment. Note: No more than a combined total of 30% of a submission can be directly quoted or closely paraphrased from outside sources, even if cited correctly. For tips on using APA style, please refer to the APA Handout web link included in the APA Guidelines section.