In: Accounting
John Anders, CPA, has worked three years for a regional CPA
firm. His responsibilities have been limited primarily to working
on retail store audits and their related tax problems. Due to the
resignation of several staff members during the year and the
addition of several new clients, the firm is badly
understaffed.
John’s firm is asked on December 10 to do the audit of a
construction company for the year ending December 31. The president
of the construction company, who is under indictment for income tax
fraud, apologized for the late timing of the invitation. He
explained that another CPA firm had been fired on December 9 due to
sloppy work and incompetence. The client states that it must have
the audit report for the annual meeting of stockholders on January
25.
The managing partner of the firm decides to accept the engagement.
A major factor in the decision is that the firm does not have any
clients in the construction industry and this will provide valuable
experience. He promptly calls the president and accepts the
audit.
The managing partner assigns John to the audit with instructions to
start immediately and do the best possible job within the specified
time constraints. By working alone for long hours and weekends,
John completes the audit on January 23 and submits his working
papers and audit report to the managing partner for review. The
partner carefully reads the audit report and congratulates John on
a job well done.
Please answer the following questions:
A. What steps in accepting the engagement were violated?
Explain.
B. What auditing standard (s) was (were) violated in performing the
audit? Explain.
Part A)
The steps that were violated in accepting the engagement are listed as below:
1) No attempt was made to interact/communicate with the previous auditor. No measures were undertaken to check the credibility of management. Due care and diligence was not performed (before the engagement was accepted) and the assignment was accepted in a haste without taking into account any unusual issues/factors/risks that could affect the performance/conduct of audit.
2) Firm's independence was not assessed before accepting the engagement.
3) The firm didn't have the requisite experience to perform the audit of the construction industry. John, himself, had no experience in handling/performing the audit of companies belonging to this industry.
4) The audit was performed without preparing the engagement letter stating the relevant terms and conditions of appointment.
_____
Part B)
The first standard of field work requires an auditor/firm to properly plan an audit and to supervise the assistants (in this case John) during the engagement. In the given case, the first standard of field work was violated as the assignment was accepted without any planning and performed without any supervision. The lack of planning is also indicated by the fact that the work was accepted and assigned to John without evaluating his competence to perform the job. Further, there was no review of the work done by John even after the completion of assignment and the report was directly submitted to the client.