American Fuel Supply Company Essay Example For Students

American Fuel Supply Company Essay American Fuel Supply Company Inc. 1. A major focus of the lawsuit Chevron Chemical filed against Touche Ross was the auditing profession’s rules regarding the â€Å"subsequent discovery of facts existing at the date of the auditor’s report†. Those rules distinguish between situations in which a client cooperates with the auditor in making all necessary disclosures and situations involving uncooperative clients. Briefly summarize the differing responsibilities that auditors have in those two sets of circumstances. Answer: International Standard of Auditing (ISA) Section 560 Subsequent Events paragraph 15 defined that â€Å"Subsequent discovery of facts existing at the date of the auditor’s report† is where the condition when after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor’s report and which if known at that date, may have caused the auditor to modify the auditor’s report, the auditor should consider whether the financial statements need revision, should discuss the matter with management, and should take the action appropriate in the circumstances. The subsequent discovery of facts requiring the recall or re-issuance of financial statements does not arise from business events occurring after the date of auditor’s report. While a number of situations may apply, the most common situation is where the previously financial statements contain material misstatements due to either unintentional or intentional actions by management. When facts are encountered that may affect the auditor’s previously issued report, the auditor should consult with his/her attorney because legal implications may be involved and actions taken by the auditor may involve confidential client-auditor communications. The auditor should determine whether the facts are reliable and whether they existed at the date of the audit report. The auditor should discuss the matter with an appropriate level of management and request cooperation in investigating the potential misstatement. Messier, Jr. , W. , Glover, S. M. Prawitt, D. F. 2008) If the auditor determines that the previously issued financial statements are in error and the audit report is affected, he/she should request that the client issue an immediate revision to the financial statements and auditor’s report. The reasons for the revisions should be described in the footnotes to the revised financial statement. (Messier, Jr. , W. , Glover, S. M. Prawitt, D. F. 2008). ISA Section 560 paragraph 16 further explained the responsibilities of the auditors in the situation when a client cooperates with the auditor in making all necessary disclosures. It stated that when management revises the financial statements, the auditor would carry out the audit procedures necessary in the circumstances, would review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation and would issue a new report on the revised financial statements. ISA Section 560 paragraph 17 highlighted that the new auditor’s report should include an emphasis of a matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements and to the earlier report issued by the auditor. The new auditor’s report would be dated not earlier than the date of approval of the revised financial statements. If the client refuses to cooperate and make the necessary disclosures, the auditor should notify the board of directors and take the following steps, if possible: * Notify the client that the auditor’s report must no longer be associated with the financial statements * Notify any regulatory agencies having jurisdiction over the client that the auditor’s report can no longer be relied upon. * Notify each person known to the auditor to be relying on the financial statements. Notifying a regulatory agency such as the SEC is often the only practical way of providing appropriate disclosure. (Messier, Jr. , W. Glover, S. M. Prawitt, D. F. 2008) The opinion of the above author also supported by ISA Section 560 paragraphs 18. It stated that when management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation and does not revise the financia l statements in circumstances where the auditor believes they need to be revised, the auditor would notify those charged with governance of the entity that action will be taken by the auditor to prevent future reliance on the auditor’s report. Sir Gawain And The Green Knight: The Role Of Women EssayI would like to support my opinion with a case. The case Fund of Funds Ltd vs. Arthur Andersen Co is an example of a case where the CPA was deemed to have had a duty to disclose. Arthur Andersen Co (AA) was the auditor for two clients, Fund of Funds Ltd (FF) and King Resources Corp. (KRC). KRC developed natural resource properties and agreed to be the sole vendor of such properties to FF at prices no higher than those charged KRS’s industrial clients. AA learned the agreement was not being met but failed to inform FF. The court ruled AA should have disclosed this fact to FF because 1) they had knowledge of the overcharges, 2) they knew of the terms of the agreement that was being violated and 3) the language of their engagement letter produced a contractual obligation to reveal such information. (Cashell, J. D. , Fuerman, R. D. ) This case proved that auditors got the obligation to disclose fraud or any misstatement to the outsiders. 4. Suppose that Touche Ross had resigned as AFS’s auditor following the completion of the 1985 audit but prior to the discovery of the error in the 1985 financial statements. What responsibility, if any, would Touche Ross have had when it learned of the error in AFS’s 1985 financial statements? Answer: According to the AU section 9561 Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report: Auditing Interpretations of Section 561, it required that the auditor to undertake to determine whether the information is reliable and whether the facts existed at the date of his report. This undertaking must be performed even when the auditor has resigned or been discharged. Hence, when Touche Ross had learned of the error in AFS’s 1985 financial statements, it still has its own responsibility to investigate its reliability and whether it existed at the date of the report although it had resigned as AFS’s auditor following the completion of the 1985 audit. If the investigation finds the financial statements or report would have been affected by the error if known earlier and it is believed there are persons urrently relying or likely to rely on the financial statements who would attach importance to the information, the auditor who have resigned should also advise the client to make appropriate disclosure of the newly discovered facts. The responsibilities of the resigned auditors in the situations in which a client cooperates with the auditors in making all necessary disclosures and situations involving uncooperative clients are totally the same with the continuing auditor. As stated in the case Fischer vs. Kletz, Peat, Marwick, Mitchell Co. (PMM) had reported on financial statements it later discovered were incorrect at the time they were issued. PMM argued their duty ended once the audit report was issued. A key factor in the court’s denial of PMM’s motion to dismiss the claim was the representations were false at the time of issuance. (Cashell, J. D. , Fuerman, R. D. ) Back to the AFS case, if the Touche Ross had resigned as an auditor for AFS, it still had the responsibilities to correct previously issued information. It is because the error happened in AFS’s 1985 financial statement which Touche Ross was fully in charged in auditing the financial statement in that particular year. In addition, Touche Ross who had resigned as an auditor of AFS should inform the successor auditor of AFS of the material misstatement so that the successor will aware of the issue and might carry out extensive audit procedures by collecting more audit evidence in the current year audit to avoid the same issue happened in the current year. References Messier, Jr. , W. , Glover, S. M. Prawitt, D. F. (2008). Auditing Assurance Services: A Systematic Approach. New York: McGraw-Hill/Irwin Arens, A. A. , Elder, R. J. , Beasley, M. S. , Amran, N. A. , Fadzil, F. H. , Muhammad Yusof, N. Z. , et al. (2008). Auditing and Assurance Services in Malaysia: An Integrated Approach (Second Edition). Selangor: Prentice Hall Cashell, J. D. Fuerman, R. D. (n. d), Auditing: The CPA’s Responsibility for Client Information. The CPA Journal. Retrieved October 12, 2009 from http://www. nysscpa. org/cpajournal/1995/SEP95/aud0995. htm International Federation of Accountants (2008). Handbook of International Auditing,