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1. AC 410 Unit 2 Homework Assignment NEW
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AC 410 Unit 2 Homework Assignment
3-31
Ron Barber, CPA, is auditing the financial statements of
DGF, Inc., a publicly held company. During the course of
the audit, Barber discovered that DGF has been making
illegal bribes to foreign government officials to obtain
business, and he reported the matter to senior
management and the board of directors of DGF.
Required:
If management and the board of directors take
appropriate remedial action, should Barber be required
to report the matter outside the company? Describe
Barber's appropriate response if management

2. and the board of directors fail to take appropriate
remedial action.
3-43
Thomas Gilbert and Susan Bradley formed a
professional corporation called “Financial Services Inc.
—A Professional Corporation,” each taking 50 percent of
the authorized common stock. Gilbert is a CPA and a
member of the AICPA. Bradley is a CPCU (Chartered
Property Casualty Underwriter). The corporation
performs auditing and tax services under Gilbert's
direction and insurance services under Bradley's
supervision.
One of the corporation's first audit clients was
Grandtime Company. Grandtime had total assets of
$600,000 and total liabilities of $270,000. In the course
of his examination, Gilbert found that Grandtime's
building with a carrying value of $240,000 was pledged
as collateral for a 10-year term note in the amount of
$200,000. The client's financial statements did not
mention that the building was pledged as collateral for
the 10-year term note. However, as the failure to
disclose the lien did not affect either the value of the
assets or the amount of the liabilities, and his
examination was satisfactory in all other respects,
Gilbert rendered an unqualified opinion on Grandtime's
financial statements. About two months after the date of
his opinion, Gilbert learned that an insurance company
was planning to loan Grandtime $150,000 in the form of
a first-mortgage note on the building. Realizing that the
insurance company was unaware of the existing lien on

3. the building, Gilbert had Bradley notify the insurance
company of the fact that Grandtime's building was
pledged as collateral for a term note.
Shortly after the events described above, Gilbert was
charged with several violations of professional ethics.
Required:
Identify and discuss at least four ethical implications of
those acts by Gilbert that were in violation of the AICPA
Code of Professional Conduct.
4-21
Jensen, Inc., filed suit against a public accounting firm,
alleging that the auditors' negligence was responsible
for failure to disclose a large defalcation that had been
in process for several years. The public accounting firm
responded that it may have been negligent, but that
Jensen, Inc., was really to blame because it had
completely ignored the public accounting firm's
repeated recommendations for improvements in
internal control.
Required:
If the public accounting firm was negligent, is it
responsible for the loss sustained by the client? Does the
failure by Jensen, Inc., to follow the auditors'
recommendation for better internal control have any
bearing on the question of liability? Explain.
4-26
The international CPA firm of Arthur Andersen faced
significant liability in conjunction with its audits of
Enron Corporation.
Required:

4. From a legal liability perspective, describe the unique
features of this audit case.
Describe the important implications of this audit case
for a firm of public accountants.
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