Required: Select the order of the steps AOW should follow with regard to dealing with a predecessor auditor and a new client before accepting the engagement.
Required: Select the order of the steps AOW should follow with regard to dealing with a predecessor auditor and a new client before accepting the engagement.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
9
![Assume that Smith & Smith, CPAS, audited Apollo Shoes Inc., last year. Now CEO Larry Lancaster wishes to engage Anderson, Olds,
and Watershed, CPAS (AOW) to audit its annual financial statements. Lancaster is generally pleased with the services provided by
Smith & Smith, but he thinks the audit work was too detalled and interfered excessively with normal office routines. AOW has asked
Lancaster to inform Smith & Smith of the decision to change auditors, but he does not wish to do so.
Required:
Select the order of the steps AOW should follow with regard to dealing with a predecessor auditor and a new client before accepting
the engagement.
Advise Smith & Smith of Lancaster's decision to change auditors. Advising Smith & Smith would be a good
business judgment as well as an act of professional courtesy.
Accept the engagement and confirm the understandings in an engagement letter if AOW has no
reservations and after all significant factors have been considered, discussed, and agreed to.
Make reasonable inquiries of Smith & Smith regarding matters that will aid in deciding whether to accept
the engagement. (AOW should ask about facts that might bear on the integrity of management,
disagreements with management about accounting and auditing matters, and Smith & Smith' understanding
of the reason[s] for the change of auditors.)
Explain to Lancaster the need to inquire of Smith & Smith and request permission to make such inquiries. 1
Discuss with Lancaster the estimated required audit time and fee arrangement with a clear explanation of
the purpose and scope of the audit. Any work that can be done by client personnel should also be
discussed so that excess audit time might be eliminated and proposed report deadlines can be reasonably
met.
To satisfy AOW's quality control objective, use procedures such as reviewing Apollo's financial statements;
inquiring of third parties such as Apollo's banks, legal counsel, investment bankers, and others in the
business community as to Apollo's reputation; and evaluating AOW's ability to serve Lancaster and Apollo
properly with reference to industry expertise, size of engagement, and available staff.
If Smith & Smith does not respond fully to AOW's questions, consider the implications of the limited
response in deciding whether to accept the engagement.
Ask Lancaster to authorize Smith & Smith to respond fully to all inquiries because Smith & Smith would be
prohibited from disclosing confidential information without former client permission.
After weighing all information received from Smith & Smith, inform Lancaster that a first time audit is more
time consuming than a recurring audit because the new audit team is generally unfamiliar with the client's
operations and does not have the benefit of past knowledge of company affairs to use as a guide.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F62192a1a-c178-4fab-b633-530d2a4c69f6%2F5ddb1443-3cb1-460a-aab5-d6f8835dca7f%2Fsuok1sm_processed.png&w=3840&q=75)
Transcribed Image Text:Assume that Smith & Smith, CPAS, audited Apollo Shoes Inc., last year. Now CEO Larry Lancaster wishes to engage Anderson, Olds,
and Watershed, CPAS (AOW) to audit its annual financial statements. Lancaster is generally pleased with the services provided by
Smith & Smith, but he thinks the audit work was too detalled and interfered excessively with normal office routines. AOW has asked
Lancaster to inform Smith & Smith of the decision to change auditors, but he does not wish to do so.
Required:
Select the order of the steps AOW should follow with regard to dealing with a predecessor auditor and a new client before accepting
the engagement.
Advise Smith & Smith of Lancaster's decision to change auditors. Advising Smith & Smith would be a good
business judgment as well as an act of professional courtesy.
Accept the engagement and confirm the understandings in an engagement letter if AOW has no
reservations and after all significant factors have been considered, discussed, and agreed to.
Make reasonable inquiries of Smith & Smith regarding matters that will aid in deciding whether to accept
the engagement. (AOW should ask about facts that might bear on the integrity of management,
disagreements with management about accounting and auditing matters, and Smith & Smith' understanding
of the reason[s] for the change of auditors.)
Explain to Lancaster the need to inquire of Smith & Smith and request permission to make such inquiries. 1
Discuss with Lancaster the estimated required audit time and fee arrangement with a clear explanation of
the purpose and scope of the audit. Any work that can be done by client personnel should also be
discussed so that excess audit time might be eliminated and proposed report deadlines can be reasonably
met.
To satisfy AOW's quality control objective, use procedures such as reviewing Apollo's financial statements;
inquiring of third parties such as Apollo's banks, legal counsel, investment bankers, and others in the
business community as to Apollo's reputation; and evaluating AOW's ability to serve Lancaster and Apollo
properly with reference to industry expertise, size of engagement, and available staff.
If Smith & Smith does not respond fully to AOW's questions, consider the implications of the limited
response in deciding whether to accept the engagement.
Ask Lancaster to authorize Smith & Smith to respond fully to all inquiries because Smith & Smith would be
prohibited from disclosing confidential information without former client permission.
After weighing all information received from Smith & Smith, inform Lancaster that a first time audit is more
time consuming than a recurring audit because the new audit team is generally unfamiliar with the client's
operations and does not have the benefit of past knowledge of company affairs to use as a guide.
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