The Lakeside Company-Auditing Cases SOLUTIONS MANUAL 11e.

The Lakeside Company-Auditing Cases SOLUTIONS MANUAL 11e. INTRODUCTORY CASE SUGGESTED ANSWERS TO DISCUSSION QUESTIONS (1) The staff auditor performs many of the detailed audit procedures, such as preparing and controlling accounts receivable confirmations. In general the work of the staff auditor is controlled by audit program and supervised by the senior auditor The senior auditor coordinates the audit at the client's location and performs many of the more difficult audit procedures, such as analytical review procedures. Usually the detailed work performed by the audit senior is more sophisticated and requires the experience gained by someone holding that rank. The audit senior is supervised by the manager. The manager and the partner have supervisory roles. Managers and partners often have more than one audit team under supervision at any given time. The partner is the person who has responsibility for determining whether the firm’s signature can be attached to audit report. (2) The partner-in-charge of an audit is the definitive decision-making position on the audit team. Although the manager and senior auditor make several decisions, they must get ultimate approval from the partner-in-charge of the audit. The consulting partner's role is to add a further degree of objectivity to the audit. The consulting partner reviews and critiques certain crucial decisions made by the audit team, such as the final audit report. The partners should be rotated to assure independence. Sarbanes-Oxley (SOX-S203) requires the identification of a Leading Partner and a Reviewing Partner. Both partners must be rotated every five years. (3) An accounting firm is a business like any other, and its management must recognize that a marketing strategy is probably necessary to generate a continual flow of sufficient operating revenues. However, in the accounting profession, disagreement exists as to the extent that such marketing should take. In the past, overt marketing was not permitted since it was considered to be unprofessional. This position was supported based on the reasoning that a firm 6 should be selected based solely on the quality of its service. No reliable system existed, though, for conveying such information to potential clients. Hence, firms with many clients tended to remain large, while smaller firms often found growth to be nearly impossible. In the free market system espoused by the United States, restrictions on such practices as advertising and solicitation were inevitably overturned. Over the past three decades, attitudes toward marketing have changed dramatically as competition has become much more intense. Advertisements by CPA firms in newspapers and magazines are now common. Newsletters such as that distributed by Abernethy and Chapman are also frequently used to increase a firm's name recognition in the business community. In the current world of business, some type of marketing strategy seems imperative if an accounting firm is to compete. Whether that marketing should extend to formal advertising is often a question of firm policy. Most importantly, the firm must ensure that potential clients know of its presence and the services that it offers. A client will probably not select a CPA firm based on advertising. However, the client may initially become aware of the firm only through some type of marketing. Interestingly, some members of the accounting profession view marketing as having had a negative impact on the profession as a whole. Price competition for new clients is often associated with the marketing of a firm. These critics assert that lowered fees result in sloppy and hurried audit work that can decrease the overall reputation of the profession. [Additional resources discussing this issue can be found in the "Suggested Readings" at the end of this case.] (4) A national or international CPA firm might consider acquiring Abernethy and Chapman for several reasons: - Although only a regional firm, Abernethy and Chapman apparently has a client base that includes a number of large clients in several different industries. By acquiring the local firm, the larger organization will frequently be able to retain these customers, thus increasing its own client list. - The larger firm may be interested in moving into this geographical region, and buying the local firm will provide an instant base on which to build a practice in the area. - The larger firm may already have an office in this location and feels that combining the practices will reduce expenses. Abernethy and Chapman might have several reasons for viewing an acquisition in a favorable light: 7 - Frequently, the purchase price will be a considerable amount of money because of the goodwill inherent in an established accounting firm. The offer to sell may be especially tempting if the partners are nearing retirement age and the future of the firm appears uncertain. - The smaller firm may have trouble dealing with increased competition from bigger firms. Often clients may decide that a change to a nationally known CPA firm should be made to add extra stature to the audit report. If a local organization has only a few large clients, it cannot economically afford to lose a significant amount of revenue in this way. A merger may help the firm to keep its clients. - The regional firm may also desire the additional backup services offered by large organizations. National CPA firms usually have experts in many industries as well as in specific audit areas who are available for consultation. In a smaller firm, this degree of assistance is not always available when a difficult accounting or auditing problem is encountered. - PCAOB registration and SEC practice presents hurdles that might be overcome through a merger with a larger firm. Many mergers have occurred in the auditing profession during recent years. Critics assert that this trend has reduced competition and will inevitably lead to a decrease in audit quality. Proponents counter by stating that mergers lead to more efficient operations and, thus, improve audit quality. Obviously, mergers will create a drastic change in the profession as more of the smaller firms disappear. Audit work in this country may possibly become concentrated within the largest CPA firms. Whether this result is good for the auditing profession may be merely a question of perspective. To the smaller firms struggling to survive and grow, the mergers are usually considered a threat as the bigger firms become more competitive. To the larger firms, the chance for continued growth and more efficient operations is always an important objective. See the Sarbanes-Oxley section below for a follow up question related to the impact of SOX on the auditing profession. (5) Moving staff from one area of a CPA firm to another can cause the perception of an independence problem. For example, the appearance of independence may be in question if a member of the consulting staff helps to install a new accounting system for a client and then she moves to the audit staff to audit this same client. See the Sarbanes-Oxley section below for a follow up question/answer related to 8 the impact of SOX, in particular the list of proscribed activities for registered CPA firms. SUGGESTED ANSWERS TO EXERCISE (1) The question requires students to address all the elements of a quality control system, as included in Statement on Quality Control Standards No. 2. In some cases, students should recognize the need for additional information. -Independence, Integrity, and Objectivity: Abernethy and Chapman requires its employees to sever all financial ties to audit clients. The AICPA's Code of Professional Conduct does not require all employees to sever ties with all audit clients. For example, staff auditors not working on a particular engagement need not sever ties. In this case, the firm exceeds the minimum level of conduct for independence. However, the case does not mention spouses or dependents of the employees. Spouses and dependents must also be independent, as defined by Section 100--Rule 101 of the Code. In this case, the firm should strengthen its requirements. -Personnel Management: The firm considers experience and technical competence in assigning personnel to audit engagements. This appears to be a reasonable quality control.