DO NOT RESPOND IF YOU HAVE NOT READ AND SEEN THE REQUIREMENTS! Requirement 1The Case RequirementsFrom the time that Loxon became GLS’s auditor, there were several audit deficiencies. Please identify and describe the key audit deficiencies that led to GLS’s persistent financial statement fraud.Requirement 2Section 10A of the SEC Act of 1934 requires auditors to report to the SEC when, during an audit, an auditor detects: 1) illegal acts which have a material impact on the financial statements, and 2) appropriate action is not taken by management and the board of directors. Loxon had responsibilities to GLS, but also to other stakeholders, such as the SEC, the PRC, and investors. Do you believe that Loxon fulfilled their responsibilities to each of the four stakeholders mentioned?Requirement 3The PCAOB and SEC coordinate their efforts to ensure public firms’ compliance with their rules and regulations and to protect investors. Section 106 of the Sarbanes-Oxley Act of 2002 requires that auditors of a U.S. issuer registered with the PCAOB consent to produce workpapers when requested by either the SEC or the PCAOB. Among the common investigations by the PCAOB is the failure to cooperate with an inspection or investigation. Likewise, Rule 102(e) of the SEC “Improper Professional Conduct” gives the SEC the power to sanction auditors if there is professional misconduct.a) What are the steps of conducting an inspection by the PCAOB?b) What are the implications of violating the PCAOB inspections rules (types of sanctions) anddiscovery of audit deficiencies on Loxon?Requirement 4In 2017, the PCAOB issued a new auditing standard to replace a portion of AS 3101 “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion” and extended it with AS 3105 “Departures from Unqualified Opinions and Other Reporting Circumstances”. The purpose of the new standards is to expand auditor reporting and enhance its relevance to investors. AS 3101 is effective for audits of fiscal years ending on or after June 30, 2019 for large accelerated filers and on December 15, 2020 for all other firms. Please review the final ruling of the AS 3101 using this link “https://pcaobus.org/Rulemaking/Docket034/2017-001- auditors-report-final-rule.pdf” and answer the following questions:a) Summarize the improvements in the expanded auditor report.b) Define Critical Audit Matters (CAMs) and give examples from the present case.c) Assume that Loxon had provided its last auditor report prior to resigning. Given thecircumstances of this case, prepare Loxon’s last audit report in accordance with the new audit report standard AS 3105: Departures from Unqualified Opinions and Other Reporting Circumstances. You may refer to an example of auditor’s report that you can access through the PCAOB website by following this link:https://pcaobus.org/Standards/Auditing/Pages/AS3105.aspxd) What are the implications of this new standard on the case study?Requirement 5Culture can be defined as: “the collective programming of the mind that distinguishes the members of one group or category of people from another” (Hofstede, 2001, p.9). According to Geert Hofstede’s cultural model, societal values are affected by ecological values and influenced by external forces (trade and investment), and hence affect the business environment.a) Describe the likely effects of the 6-D model of Geert Hofstede’s cultural dimensions on thedevelopment of financial reporting systems within the United States versus China. The link to the 6-D model of national culture by Geert Hofstede is shown below: https://geerthofstede.com/culture-geert-hofstede-gert-jan-hofstede/6d-model-of-national- culture/b) Why are the financial statements in China considered State-sensitive information, while in the U.S. they are public information?c) Countries all over the world are categorized by their regulatory and political systems, emerging as either common law countries, code law countries or mixed systems. Please describe the regulatory and political systems of the United States versus China.Requirement 6a) What are the most significant implication(s) of China’s State Secrecy Laws regarding the audit procedures and audit liability?b) Do you think that Loxon was justified in their initial reluctance to provide the workpapers to the SEC?c) Was the SEC justified in their reaction? Please support your answers.d) Roger Silvers is an accounting professor at the University of Utah and had served as a visiting economist with the SEC. Professor Silvers recently wrote a comment letter to the SEC that includes recommendations for the SEC to follow in an effort to reduce the risks that investors face when investing abroad. The Comment Letter can be accessed via this link: https://www.sec.gov/comments/emerging-markets/cll9-7328594-218510.pdf. Please read the letter and explain which course(s) of action would be most effective in reducing risk when investing abroad.
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