Analysis of a Potential Audit Client
Table of Contents
Page 4: Discussion Questions
Pages 5-6: Exercise
1. An independent auditor would be needed so they can continue to be neutral. There is a possibility it could make the auditor not as self-governing if they are auditing Lakeside as well as the bank in which they are taking loans from. The auditing firm needs to stay free in mind and presence as this may become an issue when auditing both.
2. The CPA firm should not accept the engagement because the auditor does not have a formal education in auditing and accounting nor has a background about the work being completed. The knowledge required to audit a consumer electronics company does differ significantly from that needed to audit a car dealership. The auditor does have an ethical obligation to discuss his lack of expertise as well as discussing if he plans on hiring someone with expertise specifically for this client.
3. A profit-sharing bonus plan is a concern to an auditor because this incentive could put the burden on management or employees to misstate the financial statements or be involved with fraud. There is a chance that the management or employees may be drawn to increase income by producing incorrect sales or submitting the recording of expenses. Auditors might use these events in creating logical ways to offer evidence about equality of the financial statements.
4. Yes, if a CPA firm were to develop new accounting systems specifically for the company then they would lack the independence needed to test them. Therefore Rogers should have hired a consulting or software development company to help develop a new accounting system as it could not have been completed by the auditing firm doing the current audit. It does depend on if the client is publicly traded or not. Publicly traded companies are monitored by the