Question

Margaret Dairy is a CPA and the managing partner of Dairy and Cheese, a regional CPA firm located in northwest Wisconsin. She just left a meeting with a well-respected regional credit union headquartered in her hometown. Margaret was asked whether her firm would be willing to reaudit the previous years’ financial statements and, subsequently, conduct an audit of the current years’ financials. This is the first time Margaret has been asked to conduct a reaudit, although she realizes it has become more common because of problems that Enron and WorldCom experienced. Some companies switching auditors have elected to have the new audit firm re-examine prior-period financial statements because of concerns about the quality of the earlier audit. On her way back to the office, Margaret calls her brother Mark, who is a Senior Audit Manager at a firm in Margaret’s hometown, to share her good news. She tells him that doing the audit work for the two years will increase her firm’s revenue by 10%. Mark is taken aback by the news. The new client was a client of Mark’s firm. He did not know the firm had lost the client and it might be picked up by Dairy & Cheese.

Required:

1. What issues should be of concern to Margaret in deciding whether Dairy and Cheese should accept the reaudit engagement?

2. What are Mark’s ethical obligations in this matter? Should he discuss the situation with Margaret? How about bringing it up at his firm?

3. Regardless of your answer to part 2, what inquiries should Margaret make of the predecessor auditor?

4. Assume Margaret’s firm discovers undetected fraud in the previous years’ financial statements, what should she do?

This is all the information that was provided

Answer 1

             Requirement 1

One issue that Margaret should be worried about is the datum that her firm has never piloted a reaudit. It is essential to confirm she and her firm are well-informed on the facts of a reaudit engagement before following this client. The chief problem in this case, though, is the fact that her brother was the preceding auditor, of course. This brings about a major individuality issue. This could cause a lack of objectivity in many ways: Margaret could conduct a lower quality audit because she trusts her brother, she could be less motivated to report fraud since her brother was the previous auditor, she could not go about pre-audit procedures on discussions with the predecessor auditor in the correct manner, etc.

Requirement 2

Mark is in an enormously problematic condition after getting this information. Some things he must address are whether he should debate this substance with his sister, Margaret, and whether he should bring this condition to his firm’s attention. Deliberating this condition with his sister could present some foremost issues with the engagement. If Mark and Margaret debate this case outside of the audit engagement, a lack of independence could definitely be created. This could be the case with any auditors on any audit engagement, but this is, of course, more likely to occur when the new auditor and predecessor auditor are brother and sister. On top of this, Mark must decide whether he should address his firm on this issue. If Mark would have never received this information from his sister then there would be no way for the firm to know until the client informed the firm. This may seem like the best course of action, morally, but what if Mark’s firm was planning on large growths or something else that the firm would not be able to afford with this client leaving .Because Mark has this evidence is he then motivated to stop something like this from happening; something that could harm the firm and possibly harm employees? The best course of action would be to desist from deliberating this client with his sister unless authorized by either firm within the audit engagement and to deliberate the loss of the client with only the CEO, or some higher up, to ensure nobody is impaired at an extreme degree.

Requirement 3

Margaret should make the suitable investigations that any auditor would make with any precursor auditor about any client. Of course, this must be within the limits of the audit engagement. In order to remain moral, there should be other auditors from each firm in every meeting aside from Margaret and Mark.

Requirement 4

If Margaret does decide to take on this reaudit engagement and determines fraud in the previous years’ financial statements that went unnoticed by the previous audit firm, she and her firm must treat this as if the preceding auditors were any other firm and take the appropriate actions. In order to remain ethical, there should be nothing done out of the norm to give or appear to give Mark and his firm preferential treatment.