Question

Course: Auditing and Reporting

On July 7, 2020, Seacrest & Kelly, (S&K) Chartered Professional Accountants, completed the audit fieldwork relating to the April 30, 2020 year-end audit of Dr. Mitch Weight Loss Clinics Inc. (“MWLC”). The engagement partner on the audit is, Tamara Seacrest CPA, CA, and the senior manager on the file is Jackson Zee, CPA, CA. Information regarding the client and audit is set out below:

• MWLC operates three weight loss clinics in the Mississauga area. The sole shareholder is Dr. John Mitch. Several medical doctors are employed on a part time basis as employees of the clinics. MWCL as the name suggests is a weight loss clinic. Patients/clients attend, meet with a doctor or clinic staff and then are placed on very low-calorie diets to facilitate a rapid weight loss. MWLC was previously audited by BLG Chartered Professional Accountants. Dr. Mitch told Tamara when they met that he had a dispute with the BLG partner on a personal family matter and so is changing auditors. Tamara noted that “to respect Dr. Mitch privacy – did not contact BLG. We all know doctors are highly respected in society and so no issue for client acceptance.”

• Handwritten notes in the file by Seacrest stated, “Dr. Mitch knows so many doctors in this area. I told him when we met the first time – our fee will be much lower than BLG charged and for every doctor that he refers to us for work, we will take $250 off the audit fee. We may actually end up paying Dr. Mitch.”.

• In the audit file the documentation with the heading, “Client Info” showed – “We all have been to a doctor’s office and so we are all familiar with the business, industry etc. People always need a doctor and so no going concern worries here.”

• In 2020 MWLC decided to begin providing liposuction services to patients. This cosmetic related work was promoted via a no interest three-year payment plan. MWLC expensed the cost of several pieces of the new liposuction equipment it purchased. Seacrest feels that these items should have been capitalized. The controller at MWLC decided to expense these items in order increase expenses – thereby reducing the corporate income tax that the entity will pay. Management considers this to be a legitimate reason for the selection of accounting policies. Management is fully agreeable to note disclosure of this policy for ASPE compliance, which they try to follow. Accounts receivables are presented as current assets and the audit team consider properly valued as they come from generally “wealthy” patients who can afford a cosmetic procedure.

• MWCL is the defendant of a lawsuit brought by the family of a patient who died while on the low-calorie supervised diet. MWLC administrative staff told the S&K audit senior – “people die all the time and it has nothing to do with eating less. This has nothing to do with accounting.” The audit senior, a qualified CPA, thought this was reasonable and did not record it in the documentation or tell Zee. Management also told the senior that we do not use lawyers and so no one for you to contact. (turns out this was not true, and the realities are medical practitioners do get sued)

• MWLC has a large bank loan from the Regal Bank of Canada. The bank loan has as a requirement that MWLC maintains a certain level of profitability and some maximum debt:equity ratios.

Dr. Mitch agreed to appear in a magazine advertisement for S&K where he said – “Want to trim your audit fees and use a firm that provides more professional services for doctors than anyone else -- Call S&K and tell them Mitch sent you.”

S&K issued an unmodified audit report (as provided in CAS 700).

REQUIRED:

You, CPA have been retained to review what has taken place at S&K and to prepare a detailed memorandum that identifies and discusses breaches of Assurance standards, CAS, professional ethics (CPC). Your memo should incorporate any recommendations as to how these issues could have been avoided or improved upon going forward. The party that engaged you also asked you to assess if the firm could be sued by the Regal Bank of Canada.

Answer 1

MEMORANDUM

1. SO AS TO IN CONCERN WITH THE PROFESSIONAL ETHICS,

Clause (8) of Part I of the First Schedule to the CA Act 1949 STATES THAT

THE NEW INCOMING AUDITOR SHOULD CONTACT THE PREVIOUS AUDITOR AND COMMUNICATE WITH HIM IN WRITING.

AND The requirement for communicating with the previous auditor would apply to all types of audits viz., statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard.

IT IS RECOMMENDED THAT TAMARA SHOULD HAVE CONTACTED THE BLG CPA, THE PREVIOUS AUDITOR REGARDING WHY DID HE QUIT AND REASONS FOR THE SAME.

2. AS PER AAS5 AUDIT EVIDENCE,  auditor should obtain sufficient appropriate audit evidence through compliance and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information. The AAS also explains the concept of sufficient appropriate audit evidence, factors affecting it as also the various types of assertions, internal vis a vis external evidence

3. THE SEACREST AND KELLY BEING CHARGES 250$ IN AUDIT FEE IS MEANINGLESS.

AS THE CPA IS THERE IN THE COMPANY TO VIEW AND REVIEW AND AUTHORISE THE ACCOUNTING WORK AND FOR NOTHING OTHER THAN THAT.

4. AUDIT FILE HEADING IS COMPLETELY WRONG.

5. AS PER AAS16, THATS NOT THE WAY TO JUDGE ABOUT THE GOING CONCERN FOR THE COMPANY. AS THE TERM SUGGESTS, GOING CONCERN DEPENDS ON THE ASSET AND DEBT OF THE COMPANY. AND ITS ABILITY TO RUN THE BUSINESS FURTHERMORE.

6. THE EQUIPMENT PURCHASED FOR THE LIPOSUCTION SERVICE SHOULD BE CAPITALIZED. AND THE ACCOUNTING TREATMENT DONE NY THE COMPANY BY CONSIDERING IT AS AN EXPENSE IS COMPLETELY WRONG AND THEY HAVE DONE SO TO EVADE TAX. WHICH IS COMPLETELY WRONG.

THE MACHINE SHOULD BE CAPITALIZED AND DEPRECIATION SHOULD BE CHARGED ACCORDINGLY.

7. ACCOUNTS RECEIVABLE SHOULD BE UNDER ITS REQPECTIVE HEAD AND NOT UNDER CURRENT ASSETS. THE TREATMENT DONE BY THE COMPANY IS WRONG.

8. THE LAW SUIT SHOULD BE MENTIONED IN THE REPORT AND COMPANY CANNOT ESCAPE FROM FACING LEGALITY CONCERNS. AS THE DOCTORS ARE HELD LIABLE TO THE KITH AND KIN OF THE PATIENT AS THEY WERE THE ONE WHO GAVE TREATMENT FOR THE PATIENT.

9. AS THE CLIENT HAD LARGE DEBT EQUITY RATIO WITH REGAL BANK OF CANADA, THE COMPANY IS ANSWERABLE.

10.  AS PER CLAUSE (8) of Part I of the First Schedule to the CA Act 1949 STATES THAT,

SOLICITING THE CLIENTS OR PROFESSIONAL WORK DIRECTLY OR INDIRECTLY BY ADVERTISEMETN, CIRCULAR OR BY ANY OTHER MEANS IS PROHIBITED.

BUT IN OUR CASE THE CLIENT ADVERTISES THE WORK OF THE CPA WHICH IS UNETHICAL.

CONCLUSION: THE  SEACREST AND KELLY SHOULD HAVE ISSUED A "MODIFIED AUDIT REPORT"