Question

KID CASTLE EDUCATIONAL CORPORATION AND BROCK, SCHECHTER & POLAKOFF LLP, PCAOB 10 3, 4, 5, 7, 8) PROFESSIONAL SKEPTICISM 7-58 General Background. On May 22, 2012, the audit firm of Brock Schechter & Polakoff LLP (hereafter BSP) was censured and fined 820,000 by the PCAOB in relation to its audits of public compa nies located in Taiwan and China. These public companies were listed on U.S. stock exchanges. James Waggoner, BSP's director of accounting and auditing, was the BSP auditor responsible for the audits. The charges against BSP and Waggoner include the INTERNATIONAL ETHICS FRAUD BSP failed to develop policies and procedures to assure that the firm undertook only audit engagements that it could expect to conduct with professional competence. Prior to undertaking the audits of the Taiwan and Chinese compa- nies, the firm had no experience auditing public companies in general or companies based in these locations. Further, BSP personnel lacked the ability to communicate in Chinese . BSP failed to develop policies and procedures to assure that the personnel assigned to the audits had the requisite techni- cal training and proficiency. BSP failed to monitor the audits during its annual internal review process BSP failed to comply with PCAOB standards on the plan ning, performance, and supervision of the audits . . BSP failed to gather sufficient evidence, failed to use due care BSP allowed two other audit firms, which were located in and failed to exercise professional skepticism on the audits Taiwan and China, to plan and perform the audits. BSP had minimal contact with the foreign firms, and inadequately reviewed the working papers of the foreign firms. BSP also failed to obtain and review engagement completion

Answer 1

a. Since BSP has not performed its duties adequately. There are charges against BSP and Waggoner for not conducting audits in professional manner. The charges includes:

1.     BSP failed to develop procedures and policies

2.     BSP failed to depute staff with adequate technical skills

3.     Failed to collect adequate evidence

4.     Failed to comply with PCAOB provisions and other

As per the form 10K the risk factors disclosed by the Company are very serious in nature and raising the high risk alarm to the potential auditor.

Therefore inherent and control risk would be a concern for potential auditor of Kids Castle.

b. Key Ratios

Key Ratios	Dec, 2008	Dec, 2007
Current ratio = Current assets/Current Liabilities	1.19	1.11
Quick Ratio = Current assets excluding inventory/Current Liabilities	0.88	0.80
Earning per share	0.03	0.08
Debt Equity Ratio = Long and short term loan/Shareholders equity	1.51	5.70
Return on Equity = Net earning to equity shareholders/shareholders capital	0.69	3.61

c. In case of following accounts the auditor should plan to conduct more substantive audit procedures:

1.     Review of internal control procedure in the company

2.     Physical verification of inventory and fixed assets

3.     Franchises contract and agreements

4.     Expansion plan and borrowing taken for the same

5.     Fund management operation of the company

6.     Evaluation of going concern   

d.

BSP earned total audit fee of $ 121026 in 2007 and $ 150000 in year 2008. However charges made by PCAOB, to firm and to Waggoner includes that, they failed to monitor the audit, failed to gather efficient evidences, failed to comply with the auditing standard and failed to monitor the audit work done by other audit firms.

Thus all these things create suspect on the form and Waggoner to have a tie with the management of the company and hiding the pact about the company from the shareholders. Instead of lots of lacking in the company about the following the procedure and non-compliance, they not qualified the report.

The majority work done by foreign firm, but the main issue is not monitoring the work done by foreign firm by BSP and not ensuring the adequacy of staff deputed by foreign firm.

It can be appropriate to hire foreign audit firm to conduct majority of audit work if it is monitored closely.

F.

Risk involve in doing audit of foreign companies includes,

1. Unawareness about the regulatory framework of the country

2. Unawareness about the business and political environment and un-stability

3. Unawareness about the tax rules and accounting standards

4. Economy un-stability of the company