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Unformatted text preview: Lakeside Case 2 New Clients and an Auditor's Legal Liability
By Joseph Catalano Allison DeLuca Ryan Drudy Adam Fattal Case Summary Peer Review 3partner committee 2 DocumentsAnalysis of Legal Liability and Information from Predecessor Auditor Discussion with King and Company Materiality
Was the impairment of the Sixth store material? Group Think Since the sixth store represents 1/6th of Lakeside's buildings it is material. The investment of $186,000 represents approximately ten percent of total assets. Leaving the impairment of the sixth building off the financial statements is a material violation of GAPP. The Predecessor Alternate Paths? Group Think This refusal is viewed as a "red flag" so Abernathy should be cautious about accepting the engagement. Abernathy could speak with Lakeside's management and inquire about the firm's audit history. Integrity
What action should be taken if Rogers or his staff lacked integrity? Group Think Abernathy should refuse to audit Lakeside King should have reported the lapse of integrity to personal one level above the department where the lack of integrity was noticed Peer Review
What is a peer review and why is it necessary? Group Think A study of a firm's quality control polices and procedures, followed by a report on the firm's quality of audit practice in accordance with the quality control standards. Peer reviews are necessary to help firms identify which quality control standards they comply with and which ones they need to improve. The peer review team examines the quality control policies and procedures of the firm and documents its findings. Audit Documentation
What is in a permanent file and an annual audit document file? Group Think Audit documentation is important because it is the auditor's record of compliance with GAAS Contains support for the decisions regarding planning and performing the audit, procedures performed, evidence obtained, and conclusions reached Permanent file contains information from the past years that may be relevant in the future Annual audit document file contains management's assertions that were audited, the record of the procedures performed, the evidence obtained, and the decisions made in the course of the audit. Purpose of Auditing Are CPA firms responsible for ensuring that their clients understand the purpose of an audit? Group Think Auditors have the responsibility to issue an engagement letter to the client every year informing them of the audit's objectives, management and auditor responsibilities, and any limitations of the engagement. They are not entirely responsible for ensuring the client understands the audit process Review vs. Audit Should Abernathy suggest that a review instead of an audit be performed on Lakeside? Group Think Review provides only a moderate level of assurance and is limited to inquiries and analytical procedures Audit is more thorough and more complex Based on King's qualified opinion from last year, Lakeside should continue to be audited because they may become aware of more departures from GAAP which can help to improve their internal controls and financial statements Accepting Lakeside as a Client
Would you accept Lakeside as a client? Why we would Lakeside is expanding into new markets Abernathy's would gain entry into a new audit area: consumer electronics People of integrity Possibility of Lakeside becoming a continuing client Support of previous auditor Why we wouldn't High likelihood that Lakeside will not hire us in subsequent years if we give them unfavorable opinion President Rogers illustrates a distrust for the audit profession ...
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- Fall '07