Question

1. You have been approached by Lakeside Company to be their auditor. They have fired the previous audit firm and are now looking for a new firm. Please answer the following questions concerning this potential engagement.
   1. What are the issues to consider in making this decision?
   2. Based on your answer in a) above; What is the most important consideration for your firm in making this decision? Why?
   3. What are the risks that Lakeside, the potential client, faces in engaging your firm as auditor? Why?
   4. What part does the previous Audit firm play in your decision? Why?
   5. If this was a “real world” situation and not a case study simulation; would you engage Lakeside as a client? Why

Answer 1

Lakeside Company fires their earlier Auditor and looking for a new firm.

Main issue to fired earlier Auditor would be as below –

1. Firing the companies independent auditors for legitimate reason , like dissatisfaction with firms price or Quality.
2. Any suspect from Investor point of view

As per Sarbanes – Oxley Act ( SOX) 2002, mandates that audit committee be directly responsible for the oversight of the engagement of the company’s independent auditor .

The commission general standard of auditor independent is that an auditors independence is impaired if the auditor is not or a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not , capable of exercising objective and impartial judgement on all issues

Prohibited Relationship – Normally following relationship between audit firm and the companies they are auditing are not permitted – like – Employee relationship , Contingent fees , Direct or material indirect business relationship , certain financial relationship

While accepting / engage as new Auditor – Auditor must disclose to the audit committee in writing all relationship between the audit firm and the company that may reasonably be thought to bear on the audit firm independent .  Auditor to confirm and discuss its independence with the audit committee.

1. Process the audit firm uses to ensure complete disclosure of all relations with the company and it affiliate
2. Relationship the audit firm may have with officer , board member and significant shareholders

Relationship not included in the communication because they were deemed immaterial

Engagement risk is the overall risk associated with an audit engagement .Engagement risk tends to increase when a client is in a weak financial condition or company needs additional financing in order to survive

When the auditor is risk averse , as is more likely to be the case with a large and well established firm. Its is more likely engagement with high level of engagement risk will be rejected

A new audit firm that wants to aggressively pursue new business might be more inclined to take on a client with high engagement risk , as long as it expands its audit procedure to offset risk

Auditor examine only those controls that are relevant to the engagement risk assessment .Auditor should focus on those control that can prevent , detect or correct material misstatement within the client financial statement

Accept Audit engagement – lakeside -

Auditor before accepting any audit engagement , need to look into below point :

The auditor should investigate the client , the client standing business community , financial stability and relation with it previous CPA firm.

Auditor also need to understand of the client business and industry because the nature of the business and industry affect business risk and the risk of material misstatement in the financial statement .

Auditor responsibility relating to Opening balance in an initial audit engagement .including reaudit engagement .

At the time of Initial audit engagement – which either the financial statement for the prior period were not audited or the financial statement for the prior period audited by previous auditor.

Opening Balance – While doing opening balance check , need to ensure correctness of closing balance of previous year . need to ensure accounting practice followed earlier etc.