Hw3-Auditing Theory

Topics: Audit, Auditing, Internal control Pages: 1 (274 words) Published: March 4, 2013
Homework 3
5-19
a.The fraud that was commited was very complex, and thus would have been difficult to find if it weren't for the suggestion made by Yost. As you can see, the president of the company had a hand in covering it up based on the statement released by the company. b.This is actually quite simple. First, privity of contract. Privity of contract means that the contract only applys to the people involved with contract, thus making the bank an innocent third party. The second defense is that Yost followed the proper auditing standards when conducting an audit. This means that if Yost were to find nothing, they would not be responsible. c.She will most likely win due to negligence. The company is responsible for implementing internal controls, and the president's statement about the inventory count shows how it couldnt be her fault. First City National Bank is not going to win their suit for one simple reason; the courts found that Yost followed the proper standards when consucting the audit. Just because invnetory was counted on the same day doesnt mean tht standards weren't followed. d.Under SEA of 1934, the outcomes would have been the same. On the other hand, under 10b-5, the opposite outcomes would have occured. 6-22

a.The first part of the report simply states the internal controls of the company over financial reporting. Teh second part of the report states how management is responsible for fairly presented financial reports. b.An auditor literally has to see if the internal controls are effective and if the financial reports are presented fairly.
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