Case 5.6
AMERICAN FUEL & SUPPLY COMPANY, INC.
Synopsis
American Fuel & Supply Company (AFS) was a wholesaler of automotive supplies, lawn and
garden supplies, and related merchandise. In early 1986, Touche Ross issued an unqualified opinion
on AFS’s 1984 and 1985 financial statements. Several months later, Touche discovered that AFS’s
1985 financial statements contained a material error. What to do, what to do?
After considerable discussion, Touche decided to inform AFS’s management that the company’s
1985 financial statements should be recalled. But AFS’s management would not cooperate. AFS
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American Fuel & Supply Company, Inc.—Key Facts
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1. In early 1986, Touche issued an unqualified opinion on AFS’s 1984 and 1985 financial
statements.
2. AFS’s audited financial statements were distributed to the company’s creditors, including
Chevron Chemical Company, one of its largest suppliers.
4. Touche attempted to persuade AFS’s management to recall the company’s 1985 financial
statements.
5. AFS refused to recall its 1985 financial statements and threatened to sue Touche if the
accounting firm notified third parties that it was withdrawing the audit opinion on AFS’s 1985
financial statements.
9. Chevron sued Touche alleging that the accounting firm had been negligent in auditing AFS and
had a responsibility to fully disclose its decision to withdraw the 1985 audit opinion.
Instructional Objectives
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1. To examine an audit firm’s responsibility when it discovers that it has issued an improper audit
opinion on a client’s financial statements.
2. To demonstrate that members of an audit engagement team sometimes disagree regarding the
Suggestions for Use
Like most of the cases in this text, this case can be integrated at several points in an auditing
course. Typically, I begin each semester with a “comprehensive” case that introduces students to a
wide range of auditing topics and issues. However, this short case can also be used to introduce
students to the auditing profession. This case gives students a quick “reality jolt” by exposing them
to a contentious auditor-client conflict. Although such conflicts are not a particularly “appetizing”
Suggested Solutions to Case Questions
1. AU Section 561 delineates the auditor’s responsibilities regarding the “subsequent discovery of
facts” existing at the date of the audit report. Paragraph 6 of Section 561 describes the auditor’s
responsibility when dealing with a “cooperative” client in this context, while Paragraph 8 of that
section discusses the auditor’s responsibility when dealing with an “uncooperative” client.
When the client cooperates with the auditor, the auditor should first determine the impact of the
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directors of this refusal and the steps the auditor is required to take to prevent future reliance on his
or her audit report on those financial statements. Section 561 observes that the auditor’s next course
of action will depend “upon the degree of certainty of the auditor’s knowledge that there are persons
2. The comments made by the Touche Ross audit manager indicate that the accounting firm was
3. No, Touche Ross would not have violated the client confidentiality rule by withdrawing its audit
opinion on AFS’s 1985 financial statements. One exception to the confidentiality rule allows an
4. This situation is dealt with explicitly by AU Section 9561. That section notes that the