Question

In: Accounting

You are an audit senior at Morton and Lowe Chartered Accountants LLP. The firm has recently...

You are an audit senior at Morton and Lowe Chartered Accountants LLP. The firm has recently begun to perform audits and has two partners, managers, senior and junior staff accountants respectively. Your firm has recently been approached by Don Cherry, the owner of Maple Leaf Construction, to be engaged in their upcoming audit. The company’s bank requires them to submit annual audited financial statements 60 days after year end. In addition to submitting the statements to the bank, the company is bound by specific covenants. If in violation of these covenants the bank will require full payment of the outstanding loan.

The owner tells you that he had never liked his previous auditor Dafnas and Arthurs LLP. Don tells you “they would ignore my instructions on how to complete the audit and would threaten to qualify my report if I did not make adjustments to my year end work in process.” He advises you not to contact them due to this poor relationship.

Maple Leaf Construction has projects all over the country and has recently been in the news for building new developments in marshy areas, and not building their homes up to code.

The company’s controller Phil Kessel is a recent graduate from Nipissing University and has no previous accounting experience. He was hired four months ago after the old controller Dion Phaneuf was caught for defrauding the company for over $80,000 of cash and assets.

Excerpts from financial statements are as follows:

2012

2011

Cash

   (106,584)

       76,854

Accounts receivable

1,025,896

     658,000

Work in process

                  -

1,056,000

Capital assets

     750,000

     750,000

Accounts payable

     987,000

     648,000

Bank loan

     950,000

1,000,000

Billings in excess of work completed

                  -

     650,000

Sales

3,000,000

2,000,000

Cost of Sales

     720,000

1,300,000

You have been asked by the engagement partner to analyse whether or not to accept the client.

What are three things to consider (not including engagement risks or preliminary analytical review) when accepting Maple Leaf Construction as a new client

Solutions

Expert Solution

You have been asked by the engagement partner to analyse whether or not to accept the client.:

Case Analysis :

You are an audit senior at Morton and Lowe Chartered Accountants LLP.

Your firm has recently been approached by Don Cherry, the owner of Maple Leaf Construction, to be engaged in their upcoming audit

The company’s bank requires them to submit annual audited financial statements 60 days after year end. In addition to submitting the statements to the bank, the company is bound by specific covenants. If in violation of these covenants the bank will require full payment of the outstanding loan. Now most important line is “ the client violate this covenants then the Bank will require full payment of the Outstanding Loan and companies current position ( actual)books of accounts is not showing good number ..

The owner tells you that he had never liked his previous auditor Dafnas and Arthurs LLP.

Major concern for company as well as New Auditor ( before taking this Engagement)

Don tells you “they would ignore my instructions on how to complete the audit and would threaten to qualify my report if I did not make adjustments to my year end work in process.”

Owner of the company try to influence his power on auditor to change the number and provide complete rosy picture in front o stakeholders + Management + Banker . Earlier Auditor planning to Qualify audit report but Owner dislike them and cancel their contract.

He advises you not to contact them due to this poor relationship.- Owner also try to restrict that new auditor can npt discuss with Old Auditor .

Apparently looks like Owner wants to dictate and control on Auditor to disclose only rosy picture . He loves to do manipulate number to show Banker that company is doing well and they need not to pay full Loan amount so it will be a great save for company

Company recent performance analysis is not good .

They have recently been in the news for building new developments in marshy areas, and not building their homes up to code

The company’s controller also new and not much experience on Accounting

Earlier controller was also caught due to fraud the company of over $80000 of cash and asserts

.

Financial performance

At present company is in “ Bank OD “ position . No sufficient cash to support business

Account receivable balance increased a lot in 2012 as compared with 2011 . It means cash inflow is not in good shape

Huge work in process mainly inventory balance is lying in accounts . Management has to provide proper action plan about is WIP . It might be possible that Auditor need to make some provision against WIP

Account payable balance also increased significantly . due to serious cash flow issue , company not able tocollect and pay money on time and stretching Account payable

Bank ,loan amount reduced , which is good but overall position is not in good shape so may be company will end with to pay full Bank Liability

Company established huge sale and established +ve margin but not sure aboit correctness, accuracy of this number

On above analysis , it will be very risky to accept this offer . There will be always a engagement risk . Company is not structure on good base.

What are three things to consider (not including engagement risks or preliminary analytical review) when accepting Maple Leaf Construction as a new client

Major point to consider that to establish complete ICFR ( internal Control financial reporting ) in the company to review all transaction in details

Second point to maintain “ Auditor Independence , Ethics “ New Audit firm should not allow more involvement of Owner of the company . Audiit firm will provide True and fair view after consider all accounting standard . They can not change direction as per Owners choice


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