Question
In: Accounting
Scenario: The firm of Abernethy and Chapman was asked to do consulting work for the Lakeside...
Scenario: The firm of Abernethy and Chapman was asked to do consulting work for the Lakeside company that is completely separate and unrelated to the audit of the financial statements. Discuss the potential conflict of interest when an auditor does consulting work for an audit client. Does this relationship cause the independence of the auditor to be violated? Why or why not? Since the Enron debacle, how has the accounting profession dealt with this issue?
Solutions
Expert Solution
It is very important for an auditor to maintain its independence during the course of audit. The importance is derived from the fact that any relationship between the auditor and his client should not influence his opinion on the financial statements of the client entity.
The case of Enron imposed several allegation on the accounting firm of not acting independently. It was also accused of being involved in the malpractice for continuing their alignment with the auditee company, Enron.
In the very instant case, the firm of Aberthy and Chapman was asked to do consulting work for the audit client.
Yes. There are potential conflict of interests involved in doing so. It can be a possible reason for causing violation to the Auditor entity's Indepence. It could also result into biased audit reports, erroronous reports or unjustified opinion.
It can be prevented by setting up a seperate engagement with the Lakeside Company defining the scope and nature of services to be provided.
In the aftermath of the Enron Case, the Sarbanes-Oxley Act was amended to take some stringent steps to bring this malpractice into control. The Board came up with the changes and Sarbanes Oxley delegated the Board with some primary responsibilities being:
- Registration of every Auditing Firm
- Inspection of the Auditing Firm at regural intervals
- Investigation of the Auditing Firm for crucial matters reported after inspection and
- Standard-setting for quality control.
ekkarill92 answered 1 year agoRelated Solutions
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receivable$41,000Additional paid-in capital50,000Buildings (net)
(4-year remaining life)184,000Cash and short-term
investments77,250Common stock250,000Equipment (net) (5-year
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receivable$44,700Additional paid-in capital50,000Buildings (net)
(4-year remaining life)163,000Cash and short-term
investments83,750Common stock250,000Equipment (net) (5-year
remaining life)207,500Inventory122,000Land85,500Long-term
liabilities (mature 12/31/20)162,500Retained earnings,
1/1/17202,150Supplies13,300Totals$719,750$719,750During 2017,
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paying dividends of $13,000. During 2018, Abernethy reported net
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on January 1, 2020. As of that date, Abernethy has the following
trial balance:
Debit CreditAccounts payable $55,100Accounts
receivable$44,700 Additional paid-in
capital 50,000Buildings (net) (4-year
remaining life) 163,000 Cash and short-term
investments 83,750 Common
stock 250,000Equipment (net) (5-year
remaining life) 207,500 Inventory
122,000 Land 85,500 Long-term
liabilities (mature
12/31/23) 162,500Retained earnings,
1/1/20 202,150Supplies
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declaring and paying dividends of $13,000. During 2021, Abernethy
reported net income of $136,750 while declaring and paying...
Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that...
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on January 1, 2020. As of that date, Abernethy has the following
trial balance:
Debit CreditAccounts payable $55,800Accounts
receivable$42,500 Additional paid-in
capital 50,000Buildings (net) (4-year
remaining life) 209,000 Cash and short-term
investments 67,250 Common
stock 250,000Equipment (net) (5-year
remaining life) 357,500 Inventory
136,000 Land 114,000 Long-term
liabilities (mature
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declaring and paying dividends of $13,000. During 2021, Abernethy
reported net income of $137,750 while declaring and paying...
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