06 Feb Predecessor Auditor:

ACC522 Advanced Audit Issues

Unit 1 Assignment

Read Case 1 in Lakeside Company: Analysis of a Potential Audit Client

Answer the questions below.

a. Why would the owners of Lakeside as well as the company’s banks require that an independent CPA firm perform an annual audit?

b. This case implies that no auditor with the firm of Abernethy and Chapman has an in-depth understanding of the consumer electronics industry. Is a CPA firm allowed to accept an engagement without having established the necessary expertise to oversee the audit? Would the knowledge required to audit a consumer electronics company differ significantly from that needed in the examination of a car dealership? Does the auditor have an obligation to discuss his lack of expertise, or his plans to obtain the expertise with the client?

c. Auditors must assess the possibility of fraud risk factors. Fraud risk factors are events or situations that would indicate an increased possibility that fraud has occurred. Lakeside has recently created a profit-sharing bonus plan. Why might such an incentive be a special concern to an auditor?

d. Rogers wants Abernethy and Chapman to assist his company in developing new accounting systems. Does a CPA firm face an independence problem in auditing the output of systems that the same firm designed and installed? Does your answer depend on if the client is publicly traded or not? How so?

e. After the discussion at the CPA firm, Andrews was assigned to visit the headquarters/warehouse of Lakeside to tour the facility. What should Andrews observe, and what factors should he be especially aware of during this visit?

f. Is there any reason why Lakeside might not want to hire a CPA firm that has other clients in the electronics industry?

ACC522 Advanced Audit Issues

Unit 2 Assignment

Case 2 – Exercise 1

Abernethy and Chapman

ANALYSIS OF POTENTIAL LEGAL LIABILITY

Potential Client:

Type of Engagement:

Form Completed By:

Date:

(1) Is the potential client privately held or publicly held?

(2) Evaluate the possible liability to the client that Abernethy and Chapman might incur, if the engagement is accepted.

(3) List the third parties that presently have a financial association with the potential client and could be expected to see the financial statements. These parties are also called primary and foreseen beneficiaries.

(4) Discuss the possibility that other third parties will be brought into a position where they would be expected to see the financial statements of the potential client. These parties are also called foreseeable beneficiaries.

(5) Evaluate the possible legal liability to third parties, both present and potential, that Abernethy and Chapman might incur if the engagement is accepted.

Abernethy and Chapman

INFORMATION FROM PREDECESSOR AUDITOR

Potential Client:

Form Completed By:

Predecessor Auditor:

Date of Interview:

(1) Discuss the predecessor auditor’s evaluation of the integrity of the management of the potential client.

(2) Did the predecessor auditor reveal any disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters? If so, fully describe these disagreements.

(3) What was the predecessor auditor’s understanding as to the reasons for the change in auditors?

(4) Did the predecessor auditor give any indication of other signi¬ficant audit problems associated with the potential client?

(5) Did the predecessor auditor indicate any problem in allowing Abernethy and Chapman to review prior years’ audit documentation for the potential client? If “yes,” explain

(6) Was the predecessor auditor’s response limited in any way?

Case 2 – Exercise 2

Abernethy and Chapman

Review of Predecessor Auditor’s Documentation

Client:

Predecessor Auditor:

Prepared by:

Date:

Prepare a list of the specific contents of the predecessor auditor’s documentation that should be examined by Abernethy and Chapman. Indicate each area that should be reviewed and the purpose of studying these particular areas of the audit documentation. Use the following format.