Question

Scenario for Part C

Smuckers & Nudge, CPAs, have previously been engaged by Gerrimander Corporation to perform compilations and tax returns. Harry Gerrimander, the company’s president, indicated to the accountants that he needed “something more” than they previously provided. Mr. Gerrimander told Jenny Holt, the partner in-charge of the engagement, that the resulting ?nancial statements from this proposed engagement would be used primarily for management’s purposes internally as well as short-term bank loans. Holt recommended that a review of the ?nancial statements be performed and work be commenced without an engagement letter.

As Holt proceeded with the work, she indicated uneasiness about certain ?gures and conclusions but said she would take the client’s word about the validity of some entries since the review was primarily for internal use and was not an audit.

If Holt had not relied on the representations of management, she would have detected a material act of fraud committed by management.

(a)Explain the role that an engagement letter could have played in this scenario and indicate what should have been covered in the letter.

(b)What was Holt’s duty in this review? What is the potential liability faced by Smuckers & Nudge, CPAs? Who may assert claims against the ?rm?

Answer 1

A. Engagement letter can be defined as a contract between client and accountant which defines his scope of work and decides the accountability and responsibilty of each of the respective party.

An engagement letter have played a very important role in this scenario because the purpose of this letter is to create a legal relationship among the parties. if Smukers & Nudges, CPA would have received the engagement letter it would have bring them into a contractual agreement and hence, Jenny Holt would have done her job according to her discreation. Following points should be included in the engagement letter:

- Responsibility and obligation of each party

-Fees Estimates

-Acceptance from the receipient for appointment.

-It should defines the scope of work

B. Holt' s duty in this review is to give a true and fair view on the financial statements of the garrimander Corporation. It is the responsibility of the auditor to give the unbias judgement on the financial statement of the company.

Holt can take the management representation but it is her discreation whether to accept the same or not. If she is satisfied that the representation made by company is false , she should have taken the correct step and should give the report accordingly.

Smukers and Nudge, CPAs could have lost their certificate of practice due to this act of Holt because it comes under the miscondut.