Question

1) You have been approached by Lakeside Company to be their auditor. They have fired the previous audit firm and are now looking for a new firm. Please answer the following questions concerning this potential engagement.

a. What are the issues to consider in making this decision?

b. Based on your answer in a) above; What is the most important consideration for your firm in making this decision? Why?

c. What are the risks that Lakeside, the potential client, faces in engaging your firm as auditor? Why?

d. What part does the previous Audit firm play in your decision? Why?

e. If this was a “real world” situation and not a case study simulation; would you engage Lakeside as a client? Why

Answer 1

Answer 1 ( a ) First of all , it is the most important matter to understand for an Incoming Auditor as why the previous auditor has been fired , which is not normal at all. There may be change of Auditors and that is a routine thing but firing an auditor must be a matter of great concern for the Incoming Auditor . First of all , the Incoming Auditor must discuss , in detail , with the prospective client about the reasons , which compelled him to fire the previous auditor . Then he must interact with the previous auditor about the reasons for which his client fired him .After listening to both sides, the Incoming Auditor must use his prudence in analyzing the reasons behind this abnormal action.Generally , when a decision of firing an auditor is concerned , it may be concerned with some unacceptable behaviour of the Auditor or Act , which has caused a concern for the client to take an immediate decision. It might be that the previous auditor has hidden some important information about his identity , which is crucial to become an auditor and that has been revealed by an act , compelling the client to take a decision of firing the auditor.It must be something abnormal either in behaviour or acts or deeds .

Alternatively , it might be the client , who might be an unacceptable client , which could be not acceptable to the previous auditor and he expressed his concern and got fired. It may be the case where the Auditor find the client , indulged in some illegal activities and such actions , which are detrimental to the role of an Auditor and accepting these deeds could be a bad impact on the Auditors image , which could ruin his future also . He might have , clearly stated and warned to the Client and the Client having no other option , might have fired him.

Hence, the explanation of both previous auditor and the client has to be understood with prudence and then accept the assignment of the Auditor.

Answer 1 ( b ) : The most important consideration for my firm to take decision shall be the Legal or Statutory view of the case. As an Auditor , one should first of all see whether the client , his business , his acts are legal and they are capable of doing business . He can check the record of the Client as well before joining . Once he is satisfied with the Legality aspect and the genuineness of the client , he can move further. I would also see that there is no such abnormality exist in the business , by studying the books of account .I would also see that it is a fair business , run fairly and have not been blacklisted by any organization for wrong acts. It is required because if I join them , without checking above, I might be in trouble some day.

Answer 1 ( c) From Lakeside point of view , the risks which Lakeside , as a client must ensure that the Incoming Auditor has a good reputation in the Market. He should also see that the Incoming Auditor is a genuine auditor , without having any negative status in the business. he should also see that the reasons for which the previous auditor has been fired doesn't exist with the Incoming Auditor. He should see the Qualification documents from the Incoming Auditor and ensure that he is hiring a genuine , legal and competent firm for Auditing his business.

It is required to do so that the Client doesn't faces the same or similar issues with the Incoming Auditor. Firing an Auditor again is a black spot for the client as well as the business community would always believe that something could be wrong with the client as well and to make sure he is hiring a right person, he should take extra care while finalizing a new Auditor.

Answer 1 (d ) The previous firm plays a very important role to play in this decision because the client might present the reasons to the Incoming Auditor with all wrong things in the world about the previous firm and he should see that the views of the previous firm are as important as of the prospective client. Both the explanations / reasons must be investigated and verified , in detail ,before joining the prospective client .

It is required for the Incoming Auditor because the outgoing firm is the only person , who could confirm the actions by the client. If the facts presented by the client are entirely different from what the explanation by the outgoing auditor is , then it is a matter of prudence for the Incoming Auditor to analyze , properly to conclude , what is right and what was wrong.

Answer 1 ( e ) In " real world " , it is already happening where the Auditors are fired by the Client and Auditors are also leaving the client for their reasons. This seems to be real life situation and with the proper prudence, investigation and information about the matter , I can join the Lakeside as an Auditor .

If Lakeside has some genuine reasons for firing the previous auditor and which are acceptable as an Auditor , I can join Lakeside. I have to first understand the complexities in this decision and express to the client to express the truth behind such decision and until unless the truth is acceptable to me as an Auditor, there is no harm in joining Lakeside as a client.

I must know that taking decision to fire an Auditor also shall be seen in business circles , where Lakeside has to answer to certain stakeholders but since they have taken a decision , they must be having the reasons for such big decision