Question

3.59 Predecessor and Successor Auditors. The president of Allpurpose Loan Company had a genuine dislike for external auditors. Almost any conflict generated a towering rage. Conse- quently, the company changed auditors often. The firm of Wells & Ratley (W&R), CPAs, was recently hired to audit the 2017 financial statements. W&R succeeded the firm of Canby & Company (C&C), which had obtained the audit after Albrecht & Hubbard (A&H) had been fired. A&H audited the 2016 financial statements and rendered a report that contained an additional paragraph explaining an uncertainty about Allpurpose Loan Company's loan loss reserve. Goodbye A&H! The president then hired C&C to audit the 2017 financial statements, and Chris Canby started the work, but before the audit could be completed, Canby was fired and W&R was hired to complete the audit. C&C did not issue an audit report because the audit was not finished. Required: Does the Wells & Ratley firm need to initiate communications with Canby & Company? With Albrecht & Hubbard? With both? Explain your response in terms of the purposes of communications between predecessor and successor auditors. 3.60 Client Selection. You are a CPA in a regional public accounting firm that has 10 offices in three states. Mr. Shine has approached you with a request for an audit. He is president of Hitech Software and Games Inc., a five-year-old company that has recently grown to $500 million in sales and $200 million in total assets. Shine is thinking about going public with a $25 million issue of common stock, of which $10 million would be a secondary issue of shares he holds. You are very happy about this opportunity because you know Shine is the new president of the Symphony Society board and has made quite a civic impression since he came to your medium-size city seven years ago. Hitech is one of the growing employers in the city.

Answer 1

3.59

As defined by AU section 315 communication between predecessor and successor auditors.

The predecessor auditor includes the auditor who was engaged to perform but not complete the audit of the financial statements.

In given case wells and ratley firm needs to communicate with only canby and company though the canby hadn't issue any audit report. As defined in AU 315 the wells and ratley firm needs to communicate with canby and company before accepting the audit engagement as canby and company is predecessor auditor.

No communication required by AU 315 between wells and ratley and a&h firm.