Almost a Senior Auditor
You have recently completed one full year on the audit staff of a CA firm (hereafter ‘your firm”).
During that year, you were assigned as a staff-level auditor to your firm’s examination of the
financial statements of the University of Waterloo Credit Union, (UWCU). Brenda Bailey, the
audit senior last year who was responsible for overseeing the fieldwork on a day-to-day basis,
left your firm after the audit was completed to take a position as Vice President of Finance with
UWCU. Terry Johnson, the engagement manager, informed you that, even though you were yet
to be formally promoted to ‘senior auditor,’ you would have the in-charge responsibility for this
year’s audit of UWCU. Naturally, you were anxious to do a good job and believed that this
opportunity could result in an early promotion to senior. To gather background information and
to identify matters relevant to planning this year’s audit, you first checked the correspondence
file for communications between your firm and the client; you then reviewed the report file for
prior years’ audit reports and management letters, and pulled out last year’s audit working papers
and the permanent file. Last year’s balance sheet and income statement are presented in Table 1
and Table 2, respectively.
You noted nothing unusual in your review of the correspondence file. For example, you found a
typical engagement letter, signed by the client, acknowledging their understanding of the nature
of the examination to be performed, the specific responsibilities to be performed by the client
and the CA firm, and agreement about fees and billing arrangements. Your firm bills the client
quarterly based on the firm’s standard rates for actual hours incurred plus travel and out-of-
pocket expenses for the two staff auditors, the in-charge, the manager, and the engagement
partner. The engagement letter estimated that total fees would not exceed $100,000. Although
the prior year’s engagement letter identified the same estimated fee, the firm’s standard billing
rates have increased about 10 percent on average this year. Thus if this year’s fee is to meet the
estimate, the audit team must have fewer budgeted hours this year relative to prior years.
In addition, you found several letters from your firm’s tax department documenting verbal
responses to specific tax inquiries initiated by the client. (The tax department’s time is billed
separately and is not subject to the audit engagement letter.) The tax department contact for
UWCU was Cathy Dale and you made a mental note that Cathy was the appropriate one to call if
any tax-related issues came up during the audit. Finally, you saw several letters between the
engagement partner and the Credit Union’s CEO related to client relations, including an
invitation to attend the firm’s annual golf outing.
The report file contained copies of the Credit Union’s audited financial statements and your