C244 – Advanced Auditing
Task 1
Freedom Rock Accounting (FRA) Internal Report
Attention Senior Partner: Included is my personal analysis of potential client Pure Grain Milling.
Reviewing all aspects, both legal and ethical, surrounding said engagement is imperative as
failure to do so could result in FRA’s unintentional negligence. As PGM is a publicly traded
company, Freedom Rock Accounting must follow all regulations and guidelines established by
the SEC, PCAOB, and Congress. The enclosed report includes information concerning whether
Freedom Rock Accounting can or should accept Pure Grain Millings request of an auditing
engagement for Year 7.
A1. Identify three potential legal issues or conflicts
associated with FRA’s ability to audit PGM.
From the time PGM established its business through Year 4, OFA provided bookkeeping
services to PGM. OFA merged with FRA last year, in Year 5. Concurrently, PGM had its IPO in
Year 5. Because OFA did not have experience with IPOs, PGM disengaged from OFA and engaged
a national accounting firm to audit their financial statements, creating a year gap from the date
of OFAs final dealings with PGM to the present date. Section 102 of the Sarbanes-Oxley Act of
2002 (SOX) prohibits auditors from performing bookkeeping or other services related to the
accounting records or financial statements of the audit client (Securities and Exchange
Commission, 2002a, pg.753). Because the OFA and FRA merge did not occur until Year 6, this
regulation would not be applicable, as FRA was not engaged by PGM at the time that OFA was
performing bookkeeping services for PFM, nor were they associated with OFA at that time.
SOX Section 301 states that any member of the audit committee “may not accept any
consulting, advisory, or other compensatory fee from the issuer” nor can they “be an affiliated
person of the issuer or any subsidiary thereof” (Securities and Exchange Commission, 2002).
The committee chair, Mr. Ed, would be considered to have impaired independence because he
has 10% ownership of the company and receives 10% of PGM’s dividends. The other committee
members Mr. Bill and Mrs. Mooney are both considered independent, and, therefore, are not
relevant to the audit engagement decision. While Mr. Mooney is a CPA and prepares the
individual tax returns for all of PGM’s officers, he does not prepare any of PGM’s financial
statements, nor does he have any stake or benefits in PGM. While SEC Section 10A states that
any financial relationship between parties would impair independence, there is a clause within
the code that allows for certain normal lending procedures, including but not limited to,
collateralized personal loans including mortgages and automobile loans.
Auditing Standard 9 legally obligates auditors for any public company to possess the
knowledge necessary to properly plan and execute the audit activities for each particular entity
This study source was downloaded by 100000827506713 from CourseHero.com on 02-11-2022 01:51:02 GMT -06:00
https://www.coursehero.com/file/21394073/C244-Task-1/
, (Public Company Accounting Oversight Board, 2010). As a result, FRA is legally required to have
a general understanding of all aspects of PGM’s business operations, procedures, and the
environment in which it operates to appropriately execute an effective audit.
A2. Identify three potential legal issues or
conflicts associated with FRA’s ability to audit
PGM’s 401(k) plan.
Freedom Rock Financial Services (FRFS) is currently PGM’s financial advisor and sold the
company their current 401k plan. They are presently the registered representative on record for
the 401k plan. Section 10A of the Securities Exchange Act of 1934 prohibits a company that
provides auditing services from also providing non-audit services, including but not limited to
investment banking and advisory services, brokering or dealing 9 (Securities and Exchange
Commission, 2012). Because FRFS is a subsidiary of FRA, FRA would not qualify as independent
and therefore, FRA cannot be considered unimpaired.
In Year 6, a director from FRFS left employment at FRFS and is acting as the CFO of PGM.
Section 206 of the SOX Act of 2002 states: “It shall be unlawful for a registered public
accounting firm to perform for an issuer any audit service required by this title, if a chief
executive officer, controller, chief financial officer, chief accounting officer, or any person serving
in an equivalent position for the issuer, was employed by that registered independent public
accounting firm and participated in any capacity in the audit of that issuer during the 1-year
period preceding the date of the initiation of the audit.” (Securities and Exchange Commission
Oxley Act, 2002b, pg. 774). As mentioned in the rule, FRFS and its subsidiaries are prohibited
from performing any audit or assurance services for a company for one year directly following
any employee leaving the firm and serving in any kind of executive leadership position.
Another potential legal issue that may arise is the possibility for violating Section 303 of
the SOX Act of 2002. In conjunction with the direct violation of Section of Section 206 of the
SOX Act, there is the looming possibility for a violation of Section 303. Section 303 states the
following: “It shall be unlawful, in contravention of such rules or regulations as the Commission
shall prescribe as necessary and appropriate in the public interest or for the protection of
investors, for any officer or director of an issuer, or any other person acting under the direction
thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead
any independent public or certified accountant engaged in the performance of an audit of the
financial statements of that issuer for the purpose of rendering such financial statements
materially misleading.” (Securities and Exchange Commission Oxley Act, 2002c, pg. 778) The
probability of this happening is actually pretty high due to the form Freedom Rock Financial
Services employee now acting as the CFO at Pure Grain Milling. Due to his knowledge of FRA’s
auditing procedures as well as his former influence over the staff that will be conducting the
audit, it is reasonable to believe that this individual could potentially use this history as a means
of manipulation and could influence the overall results of the audit.
This study source was downloaded by 100000827506713 from CourseHero.com on 02-11-2022 01:51:02 GMT -06:00
https://www.coursehero.com/file/21394073/C244-Task-1/
Task 1
Freedom Rock Accounting (FRA) Internal Report
Attention Senior Partner: Included is my personal analysis of potential client Pure Grain Milling.
Reviewing all aspects, both legal and ethical, surrounding said engagement is imperative as
failure to do so could result in FRA’s unintentional negligence. As PGM is a publicly traded
company, Freedom Rock Accounting must follow all regulations and guidelines established by
the SEC, PCAOB, and Congress. The enclosed report includes information concerning whether
Freedom Rock Accounting can or should accept Pure Grain Millings request of an auditing
engagement for Year 7.
A1. Identify three potential legal issues or conflicts
associated with FRA’s ability to audit PGM.
From the time PGM established its business through Year 4, OFA provided bookkeeping
services to PGM. OFA merged with FRA last year, in Year 5. Concurrently, PGM had its IPO in
Year 5. Because OFA did not have experience with IPOs, PGM disengaged from OFA and engaged
a national accounting firm to audit their financial statements, creating a year gap from the date
of OFAs final dealings with PGM to the present date. Section 102 of the Sarbanes-Oxley Act of
2002 (SOX) prohibits auditors from performing bookkeeping or other services related to the
accounting records or financial statements of the audit client (Securities and Exchange
Commission, 2002a, pg.753). Because the OFA and FRA merge did not occur until Year 6, this
regulation would not be applicable, as FRA was not engaged by PGM at the time that OFA was
performing bookkeeping services for PFM, nor were they associated with OFA at that time.
SOX Section 301 states that any member of the audit committee “may not accept any
consulting, advisory, or other compensatory fee from the issuer” nor can they “be an affiliated
person of the issuer or any subsidiary thereof” (Securities and Exchange Commission, 2002).
The committee chair, Mr. Ed, would be considered to have impaired independence because he
has 10% ownership of the company and receives 10% of PGM’s dividends. The other committee
members Mr. Bill and Mrs. Mooney are both considered independent, and, therefore, are not
relevant to the audit engagement decision. While Mr. Mooney is a CPA and prepares the
individual tax returns for all of PGM’s officers, he does not prepare any of PGM’s financial
statements, nor does he have any stake or benefits in PGM. While SEC Section 10A states that
any financial relationship between parties would impair independence, there is a clause within
the code that allows for certain normal lending procedures, including but not limited to,
collateralized personal loans including mortgages and automobile loans.
Auditing Standard 9 legally obligates auditors for any public company to possess the
knowledge necessary to properly plan and execute the audit activities for each particular entity
This study source was downloaded by 100000827506713 from CourseHero.com on 02-11-2022 01:51:02 GMT -06:00
https://www.coursehero.com/file/21394073/C244-Task-1/
, (Public Company Accounting Oversight Board, 2010). As a result, FRA is legally required to have
a general understanding of all aspects of PGM’s business operations, procedures, and the
environment in which it operates to appropriately execute an effective audit.
A2. Identify three potential legal issues or
conflicts associated with FRA’s ability to audit
PGM’s 401(k) plan.
Freedom Rock Financial Services (FRFS) is currently PGM’s financial advisor and sold the
company their current 401k plan. They are presently the registered representative on record for
the 401k plan. Section 10A of the Securities Exchange Act of 1934 prohibits a company that
provides auditing services from also providing non-audit services, including but not limited to
investment banking and advisory services, brokering or dealing 9 (Securities and Exchange
Commission, 2012). Because FRFS is a subsidiary of FRA, FRA would not qualify as independent
and therefore, FRA cannot be considered unimpaired.
In Year 6, a director from FRFS left employment at FRFS and is acting as the CFO of PGM.
Section 206 of the SOX Act of 2002 states: “It shall be unlawful for a registered public
accounting firm to perform for an issuer any audit service required by this title, if a chief
executive officer, controller, chief financial officer, chief accounting officer, or any person serving
in an equivalent position for the issuer, was employed by that registered independent public
accounting firm and participated in any capacity in the audit of that issuer during the 1-year
period preceding the date of the initiation of the audit.” (Securities and Exchange Commission
Oxley Act, 2002b, pg. 774). As mentioned in the rule, FRFS and its subsidiaries are prohibited
from performing any audit or assurance services for a company for one year directly following
any employee leaving the firm and serving in any kind of executive leadership position.
Another potential legal issue that may arise is the possibility for violating Section 303 of
the SOX Act of 2002. In conjunction with the direct violation of Section of Section 206 of the
SOX Act, there is the looming possibility for a violation of Section 303. Section 303 states the
following: “It shall be unlawful, in contravention of such rules or regulations as the Commission
shall prescribe as necessary and appropriate in the public interest or for the protection of
investors, for any officer or director of an issuer, or any other person acting under the direction
thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead
any independent public or certified accountant engaged in the performance of an audit of the
financial statements of that issuer for the purpose of rendering such financial statements
materially misleading.” (Securities and Exchange Commission Oxley Act, 2002c, pg. 778) The
probability of this happening is actually pretty high due to the form Freedom Rock Financial
Services employee now acting as the CFO at Pure Grain Milling. Due to his knowledge of FRA’s
auditing procedures as well as his former influence over the staff that will be conducting the
audit, it is reasonable to believe that this individual could potentially use this history as a means
of manipulation and could influence the overall results of the audit.
This study source was downloaded by 100000827506713 from CourseHero.com on 02-11-2022 01:51:02 GMT -06:00
https://www.coursehero.com/file/21394073/C244-Task-1/
