Question

Q4-Part B
Jenny Sun, a new partner with the regional CPA firm of Lind &Link, was recently appointed to the board of directors of
a local civic organization. The chairman of the board of the civic organization is Musk Train, who is also the owner of a
real estate development firm, Trendy Corporation.
Sun was quite excited when Train indicated that his corporation needed an audit and he wished to discuss the matter
with her. During the discussion, Sun was told that Trendy Corporation needed the audit to obtain a substantial amount of
additional financing to acquire another company. Presently, Trendy Corporation is successful, profitable, and committed
to growth. The audit fee for the engagement should be substantial.
Because Trendy Corporation appeared to be a good client prospect, Sun tentatively indicated that Lind &Link wanted to
do the work. Sun then mentioned that Lind &Link’s quality control policies require an investigation of new clients and
approval by the managing partner, Lee Tower.
Sun obtained the authorization of Train to make the necessary inquiries for the new client investigation. Train was found
to be a highly respected member of the community. Also, Trendy Corporation was highly regarded by its banker and its
attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative.
As a final part of the investigation process, Sun contacted Train’s former tax accountant, Bill Turner. Sun was surprised
to discover that Turner did not share the others’ high opinion of Train. Turner related that on an IRS audit 10 years ago,
Train was questioned about the details of a large capital loss reported on the sale of a tract of land to a trust. Train told
the IRS agent that he had lost all the supporting documentation for the transaction, and that he had no way of finding
out the names of the principals of the trust. A search by an IRS auditor revealed that the land was recorded in the name
of Train’s married daughter and that Train himself was listed as the trustee. The IRS disallowed the loss and Train was
assessed a civil fraud penalty. Sun was concerned about these findings, but eventually concluded that Train had
probably matured to a point where he would not engage in such activities.
Required:
a) Present arguments supporting a decision to accept Trendy Corporation as an audit client.
b) Present arguments supporting a decision not to accept Trendy Corporation as an audit client.
c)Assuming that you are Lee Tower, set forth your decision regarding acceptance of the client, identifying those
arguments from part (a) or part (b) that you found most persuasive.

Answer 1

a) Arguments supporting a decision to accept Trendy corporation as an audit client are that the audit fees could boost the revenue of the audit firm. Community respects the organisation which could further increase the scope of getting new clients for the audit firm. Bankers and the attorney also respect the firm and Dun & Bradstreet which are known for their database also consider the firm to be decent.

b) Arguments supporting a decision not to accept the corporation as an audit client could be based on the findings given by the tax accountant which occurred 10 years ago. It could be that Train still continues which such frauds but on a small scale and as the corporation is highly profitable, it could be that Train would be bribing middlemen and thus is successful in keeping a good image, this could be used as an argument.

c) Assuming I am Lee Tower, my decision would be take the client as nothing has been fraudulent about the company in the public space and that it would increase the customer base and boost revenue by taking a large client which could prove beneficial for the business.