Question

Romello Accounting LLP is a small CPA firm consisting of three partners and seven other professional staff. The firm offers full attestation and assurance services. Most of the work is for small and medium-sized nonpublic companies. The firm is registered with the PCAOB and does audits of about 30 penny stock or pink sheet companies and broker-dealers each year.

Tony Romello, the managing partner of the firm, has been the review partner on all audits for the last several years. Unfortunately, Tony encountered major health concerns in the last month and will not be available for the upcoming busy season. Michelle Thompson and Max King, the two remaining partners, are discussing staffing during the busy season.

“I am sorry that Tony is so ill, but I am concerned about our staff needs over the next three months. With two senior auditors and five staff auditors, we are all going to be very busy. I guess it is too late to hire experienced staff and get them trained quickly,” Michelle stated.

“Don’t forget that we will need a review partner,” Max mused. “Hey, I could be the review partner for your audits and you can be review partner on my audits.”

“I almost forgot that,” Michelle said. “But don’t we need to get a review partner who hasn’t worked on the audits the last two years? That would exclude both of us, since we are switching off audits every five years. . . . Hey, maybe we can get Tom Mullins, CPA, to be our review partner on a contract basis?”

Max immediately objected. “You know that, as a retired Big Four audit partner, he would eat up our slim profits with his contract rate. Let’s just make do this year and start planning to have a new partner by this time next year.”

“We can’t do that,” Michelle countered. “When we have the PCAOB inspections, we will get penalized. We would also be cited in our peer reviews. No, no, I’m not comfortable thinking of not having a reviewpartner. Also, without Tony this year, you and I will be busy supervising the staff without the added responsibilities of being review partner.”

“Oh brother, you are such a rule follower!”

Questions

Consider the staffing of audits in responding to the following questions.

1) Identify the stakeholders of audits and their interests. Is there a difference between stakeholders and interests of public versus nonpublic companies?

2) What are a firm’s considerations in having review partners? Does it really matter from a professional judgment perspective whether review partners rotate off after a prescribed number of years? Explain.

3) Assume Max convinces Michelle to let him serve as the review partner forall audits and Michelle will serve as the engagement partner on all audits. Do you see any problems with this approach from an ethical perspective?

Answer 1

1. Stakeholders of Audit :

Investors as they need to know about the financial position of the company. Also used in due diligence.

Creditors: To know about the credit worthiness of the company.

Banks: when the banks provide financing, audit report is an authentic source to know about the financial position of the company.

Stakeholders of non public and public companies are the same except the investors in general. Because non public companies don't have the right to issue shares and hence they don't have any public investor base but their shares are privately placed and those investors also require their audit reports.

2. Firms considerations in having review partner are:

Engagement quality control is the most important thing as that involves having review partners cross checking the conclusions reached by the audit teams in their various assignments. This improves efficiency and check the vulnerable areas of compromise.

Yes, review partners generally rotate after a period of 3 years as that would assure independence and objectivity of the audit reports to its stake holder's.

3. Yes, according to the auditing standards the reviewing partners are the ones who have not worked on that engagements from the last 2 years and they should be not related to the engagement partner or having any indirect relationship with them which compromises their independence and objectivity.

It is not ethical on their partner to switch reviewing arrangements as it compromises both of their independence and doesn't provide a better and assured conclusions to the audit reports.