This concept becomes even more relevant when transactions may not be made at arms-length, often involving related parties. This was the case with Lincoln Savings and Loan complex real estate transactions. Arthur Young should not have accepted the questionable documentary evidence provided by Lincoln employees to corroborate the savings and loan’s real estate transactions.
Auditors have a responsibility when a client violates the substance-over- principle. The auditor should be examining and testing client transactions to ensure this principle is not being violated. If a discrepancy is discovered, it needs to be considered in terms of the overall effect on the client’s financial statements. If the misstatement is material, it must be corrected or the auditor needs to issue a qualified or adverse opinion.
2. Explain how the acceptance of large, high-risk audit clients for relatively high audit fees may threaten an audit firm's de facto and perceived independence. Under what circumstances such prospective clients should be avoided?
When an auditing firm’s clients are large, high-risk clients for relatively high audit fees, there is a risk that independence will be compromised if it has the potential to end the relationship with a profitable high-risk client. Add to this, the client having a high audit risk, and it has the potential to make the audit