Auditor Responsibilities The management of Imperial Valley Thrift & Loan was pressuring the auditors to give an unmodified opinion. If the auditors decided to modify the opinion, then in the client's view, this would present a picture to their customers and the regulators that their financial statements were not accurate. The client maintained that this would be a blow to its integrity and would shake depositors' confidence in the institution.

On one hand, the auditors were very cognizant of their responsibility to the regulatory authority, and they were also concerned about providing an accurate picture of Imperial Valley's financial health to Manny Gonzalez or other potential investors. On the other hand, they wondered whether they were holding the client to standards that were too strict.

After all, the audit report issued in the preceding year was unmodified with an emphasis-of-matter paragraph on the capital impairment issue. They also wondered whether the doors of the institution would be closed by the regulators if they gave a qualified or adverse opinion. What impact could this action have on the depositors and the economic health of the community?

Bill Stanley wondered whose interests they were really representing-depositors, shareholders, management, the local community, or regulators, or all of these. Stanley knew that he would soon have to make a recommendation about the type of audit opinion to be issued on the 2013 financial statements of Imperial Valley Thrift & Loan. Before approaching the advisory partner on the engagement, Stanley drafted the memo on the next page to file.

Questions

1. What is the role of professional skepticism in auditing financial statements? Do you think that the auditors were skeptical enough in evaluating the operations of Imperial Valley?

2. a. Assume that the auditors decide to support management's position and reduce the amount of loan write-offs. The decision was made in part because of concerns that regulators might force the bank to close its doors, and then many customers would have nowhere else to go to borrow money. Evaluate the auditors' stage of moral reasoning in making this decision.

b. Assume instead that the auditors insist on a higher level of loan write-offs and allowance for uncollectibles to reserve for loan losses. What level of reasoning are they at in making this decision?

3. Evaluate the facts of the case from the perspective of materiality and risk assessment. How does your evaluation help in determining the appropriate audit opinion to give in the Imperial Valley case? What opinion do you think is appropriate in this case? Why?

4. Assume that you were asked to review the information in this case as the advisory partner on the audit of Imperial Valley Thrift & Loan. Using the relevant steps in the Integrated Ethical Decision-Making Process explained, analyze the case and come up with a decision on what type of opinion to recommend to management.