The audit report that the CPA firm issued.

Sample Solution

  The audit report that the CPA firm issued was a standard unqualified opinion. This means that the CPA firm believes that the financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles (GAAP). However, the audit report also includes a number of caveats that suggest that the CPA firm may have had some concerns about the financial statements. For example, the audit report states that the CPA firm was unable to obtain sufficient audit evidence regarding certain significant accounts. This suggests that the CPA firm may have been unable to verify the accuracy of the financial statements.

Full Answer Section

  Legal liability to third parties who relied on financial statements Under both common law and federal securities laws, third parties who relied on financial statements that were audited by a CPA firm may be able to hold the CPA firm liable for damages if the financial statements were inaccurate. Under common law, third parties can sue CPA firms for negligence. To establish negligence, third parties must show that the CPA firm owed them a duty of care, that the CPA firm breached that duty of care, and that the breach of duty caused the third parties to suffer damages. Under federal securities laws, third parties can sue CPA firms for securities fraud. To establish securities fraud, third parties must show that the CPA firm made false or misleading statements about the financial statements, that the third parties relied on those statements, and that the third parties suffered damages as a result. Statement of generally accepted auditing standards (GAAS) violated The CPA firm may have violated a number of GAAS in performing the audit. For example, the CPA firm may have violated GAAS by failing to obtain sufficient audit evidence regarding certain significant accounts. The CPA firm may also have violated GAAS by failing to properly document the audit. Responsibility of management and auditor for financial reporting Under the Sarbanes-Oxley Act (SOX), both management and the auditor have a responsibility for financial reporting. Management is responsible for the preparation of the financial statements, and the auditor is responsible for auditing the financial statements. However, the auditor's responsibility is limited to providing reasonable assurance that the financial statements are free from material misstatement. This means that the auditor is not responsible for detecting every single error or omission in the financial statements. Which party should have the greater burden? In my opinion, management should have the greater burden for financial reporting. This is because management is the party that has the most direct control over the financial statements. Management is responsible for choosing the accounting policies that will be used to prepare the financial statements, and management is also responsible for making sure that the financial statements are accurate. Sanctions available under SOX The PCAOB can impose a number of sanctions on management or the audit firm that is found to have violated SOX. These sanctions include:

• Censure
• Reprimand
• Suspension
• Bar

The PCAOB can also impose monetary fines on management or the audit firm. Key action or actions that the PCAOB should take The PCAOB should take the following key actions in order to hold management or the audit firm accountable for the accounting irregularities:

• Conduct a thorough investigation of the matter
• Issue a report that identifies the violations of SOX
• Impose appropriate sanctions on the responsible parties

The PCAOB should also take steps to prevent similar accounting irregularities from happening in the future. This could include requiring audit firms to implement additional internal controls or requiring management to receive additional training on SOX compliance. I hope this response answers your questions about the audit report