Question

Under the Private Securities Litigation Reform Act, Baker, CPA, reported certain uncorrected illegal acts to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, what is Baker required to do?

1) Resign from the audit engagement within 10 business days.
2) Deliver a report concerning the illegal acts to the SEC within one business day.
3) Notify the stockholders that the financial statements are materially misstated.
4) Withhold an audit opinion until Supermart takes appropriate remedial action.

Answer 1

Baker, CPA is required to resign from the audit engagement within 10 business days after Supermart's board of directors failed to report the uncorrected illegal acts to the SEC, which materially affect the financial statements.

Step-by-step explanation:

Under the Private Securities Litigation Reform Act, if Baker, CPA, has reported certain uncorrected illegal acts to Supermart's board of directors and Supermart fails to take the necessary remedial action, there are specific steps Baker is required to follow. Since Supermart's board of directors refused to inform the SEC and there's a material effect on the financial statements, Baker must take the next step as outlined by the Act. The CPA is required to resign from the audit engagement within 10 business days.

This action is taken to dissociate the auditor from the situation where their professional ethics could potentially be compromised, and to adhere to the regulations that govern auditors' conduct when illegal acts affecting the financial statements are detected. It is important to note that providing a modified audit opinion or reporting to shareholders is not the prescribed course of action in the situation outlined by the Act. Baker is expected to follow the legal protocol to ensure compliance with the law and to uphold the integrity of the financial reporting process.