Post, CPA, accepted an engagement to audit the financial statements of General Company, a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying auditing procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud.

Required:

a. Describe Post's responsibilities regarding the circumstance described.

b. Describe Post's responsibilities to report (including what type of opinion) on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for fraud.

c. Describe Post's responsibilities to report (including what type of opinion) on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by fraud.

d. Describe the circumstances in which Post may have a duty to disclose fraud to third parties outside General's management and its audit committee.

CPA Post must communicate immediately with management about the suspected fraud. He would discuss the fact that it is likely they will not have a 'clean' (unqualified) opinion at the conclusion of their audit. He should propose a separate engagement to determine the actuality of fraud and the possible extent of that fraud. He should ask whether the client would pursue criminal fraud. If so, the fraud unit of the local police department for white collar crime should be contacted. In terms of the expense involved, the police can and will conduct part of the investigation while pursuing criminal actions.

b. If the Audit Committee or the Board of Directors won't allow the investigation, Post should withdraw from the engagement immediately. If not that action, they he should explain that an adverse opinion might result which includes a scope limitation imposed by management. Not a pretty scene.

c. If Post completes the audit and can attest to the likelihood of fraud including an estimate of the amount, he can issue a qualified opinion subject to the effect of the material item. It is further possible that material fraud may raise the issue of a 'going concern' which could generate another paragraph in the audit opinion.

d. Post cannot disclose fraud without the consent of the audit committee or management unless he is approached by the legal authorities including the courts or grand jury to answer a deposition, a subpoena, or other legal enforcement document.