RATRI ANGGARANI 125020307121007

AUDITING LABORATORY
ASSIGNMENT 1
INTRODUCTORY CASE
1. The partner is the person who has responsibility for determining whether the firms
signature can be attached to audit report. The manager and the partner have supervisory
roles. Managers and partners often have more than one audit team under supervision at
any given time. The senior auditor coordinates the audit at the client's location and
performs many of the more difficult audit procedures, such as analytical review
procedures. Usually the detailed work performed by the audit senior is more sophisticated
and requires the experience gained by someone holding that rank. The audit senior is
supervised by the manager. The staff auditor performs many of the detailed audit
procedures, such as preparing and controlling accounts receivable confirmations. In
general the work of the staff auditor is controlled by audit program and supervised by the
senior auditor.
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2. The partner-in-charge of an audit is the definitive decision-making position on the audit
team. Although the manager and senior auditor make several decisions, they must get
ultimate approval from the partner-in-charge of the audit. The consulting partner's role is
to add a further degree of objectivity to the audit. The consulting partner reviews and
critiques certain crucial decisions made by the audit team, such as the final audit report.
The partners should be rotated to assure independence.
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3. An accounting firm is a business like any other, and its management must recognize that a
marketing strategy is probably necessary to generate a continual flow of sufficient
operating revenues. However, in the accounting profession, disagreement exists as to the
extent that such marketing should take. In the past, overt marketing was not permitted
since it was considered to be unprofessional. This position was supported based on the
reasoning that a firm should be selected based solely on the quality of its service. No
reliable system existed, though, for conveying such information to potential clients.
Hence, firms with many clients tended to remain large, while smaller firms often found
growth to be nearly impossible. In the free market system espoused by the United States,
restrictions on such practices as advertising and solicitation were inevitably overturned.

Over the past three decades, attitudes toward marketing have changed dramatically as
competition has become much more intense. Advertisements by CPA firms in newspapers
and magazines are now common. Newsletters such as that distributed by Abernethy and
Chapman are also frequently used to increase a firm's name recognition in the business
community. In the current world of business, some type of marketing strategy seems
imperative if an accounting firm is to compete. Whether that marketing should extend to
formal advertising is often a question of firm policy. Most importantly, the firm must
ensure that potential clients know of its presence and the services that it offers. A client
will probably not select a CPA firm based on advertising. However, the client may
initially become aware of the firm only through some type of marketing.
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4. Although only a regional firm, Abernethy and Chapman apparently have a client base that
includes a number of large clients in several different industries. By acquiring the local
firm, the larger organization will frequently be able to retain these customers, thus
increasing its own client list. The larger firm may be interested in moving into this
geographical region, and buying the local firm will provide an instant base on which to
build a practice in the area. The larger firm may already have an office in this location and
feels that combining the practices will reduce expenses.
Frequently, the purchase price will be a considerable amount of money because of the
goodwill inherent in an established accounting firm. The offer to sell may be especially
tempting if the partners are nearing retirement age and the future of the firm appears
uncertain. The smaller firm may have trouble dealing with increased competition from
bigger firms. Often clients may decide that a change to a nationally known CPA firm
should be made to add extra stature to the audit report. If a local organization has only a
few large clients, it cannot economically afford to lose a significant amount of revenue in
this way. A merger may help the firm to keep its clients. The regional firm may also desire
the additional backup services offered by large organizations. National CPA firms usually
have experts in many industries as well as in specific audit areas who are available for
consultation. In a smaller firm, this degree of assistance is not always available when a
difficult accounting or auditing problem is encountered. PCAOB registration and SEC
practice presents hurdles that might be overcome through a merger with a larger firm.
Many mergers have occurred in the auditing profession during recent years. Critics assert
that this trend has reduced competition and will inevitably lead to a decrease in audit
quality. Proponents counter by stating that mergers lead to more efficient operations and,

thus, improve audit quality.

Obviously, mergers will create a drastic change in the

profession as more of the smaller firms disappear. Audit work in this country may
possibly become concentrated within the largest CPA firms. Whether this result is good
for the auditing profession may be merely a question of perspective. To the smaller firms
struggling to survive and grow, the mergers are usually considered a threat as the bigger
firms become more competitive. To the larger firms, the chance for continued growth and
more efficient operations is always an important objective.
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5. Moving staff from one area of a CPA firm to another can cause the perception of an
independence problem. For example, the appearance of independence may be in question
if a member of the consulting staff helps to install a new accounting system for a client
and then she moves to the audit staff to audit this same client.
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Case 1
ANALYSIS OF A POTENTIAL AUDIT CLIENT
1. Financial statements are frequently relied on by outside parties such as stockholders and
banks when making decisions about an enterprise. However, financial statements are the
representations of the management of the company. As such, these statements will not
necessarily be fairly presented. Material misstatements may exist in the form of errors,
irregularities, or illegal acts. The management might, for example, have an insufficient
knowledge of generally accepted accounting principles to produce appropriate statements.
Human error or bias is also possible in the gathering and reporting of financial
information. In addition, the management may have fraudulently manipulated the data in
hopes of achieving some objective. Outside parties are aware that the financial information
produced by a company and its management may not always be reliable. Hence, to add
credibility to this reporting process, independent experts are retained to audit the financial
statements and test the underlying accounting records. These auditors then issue an
opinion for the benefit of outside parties as to the fair presentation of the financial
statements in conformity with generally accepted accounting principles.

This added

degree of assuredness allows decision-makers to rely on reported financial information.

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2. A CPA firm could not be expected to maintain expertise in every potential industry that it
might audit. In reviewing a potential client, the firm should evaluate its ability to gain the
necessary industry expertise prior to the actual audit, but no requirement exists that this
knowledge must be possessed prior to accepting the engagement.
Each industry may have its own specific accounting practices.
industries frequently offer unique auditing problems.

In addition, certain

Thus, without a thorough

investigation, the auditor cannot ascertain the knowledge that will be needed in examining
a potential client. In the consumer electronics business, for example, the methods of
distribution as well as credit policies would be significantly different from those found in a
car dealership. Damaged or obsolete inventory are other problems that might be more
important in this specific industry. Hence, knowledge of one type of operation does not
necessarily mean that the auditor has the expertise needed to examine a client operating in
a different industry.
Auditing standards require that auditor have the expertise by the completion of the audit,
but this expertise need not be in place at the beginning. It would be unethical to
misrepresent a firms experience, but it need not be volunteered.

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3. A profit-sharing bonus plan gives employees an added incentive to seek increases in
company income; a larger profit figure will lead to a larger bonus at the end of the year.
Consequently, employees may be tempted to inflate income artificially by creating false
sales or deferring the recording of expenses. An auditor must always be alert for situations
that can promote the possibility of such irregularities. A profit-sharing bonus plan may
well have only positive effects on company employees. However, the auditor should not
be so naive as to fail to recognize that some individuals may take advantage of such plans
by manipulating the financial records. This problem may be especially significant in the
Lakeside Company because the bonus plan is new and the stores are geographically
located at a distance from the home office. New plans require adaptation by company
controls and such separation always increases potential control concerns. In addition,
Rogers has already mentioned that some of the internal control systems are no longer
adequate. Thus, the possibility of inflated income figures is even more of a possibility.
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4. Critics of the auditing profession have argued vehemently for a number of years that
advisory services such as those discussed in this question taint the appearance (and
possibly the reality) of independence. These services may appear to the public to give the
audit firm a financial interest in the success of the company. This argument holds that the
firm will now want the client to succeed as proof of the quality of the advice that was
given. In addition, the audit team may be less judicious in investigating these systems
since they are aware that members of their own firm designed and installed them.
Audit firms counter by stating that adequate safeguards have been put into place to ensure
continued independence. In addition, firms are not allowed to give many types of advice
that might jeopardize their independence. Finally, audit firms must make certain that their
services are limited to making recommendations, not carrying out management decisions.
The firm cannot make decisions for the client.
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5. Lists a number of steps that can be performed in a plant tour to avoid later "surprises" as
well as to assist the firm in establishing an appropriate audit fee. The first three are typical

of a plant tour. The others go beyond the typical tour. Should not be expected to anticipate
each of these procedures but the question can be used to emphasize the importance of the
auditor's complete understanding of the audit client. These steps include:
Inspect inventory for possible obsolescence and an indication of the major product lines

of the company.
Verify the presence or absence of a perpetual inventory system.
Review manufacturing facilities for indication of level of activity as well as any idle

machinery.
Review journals for careful preparation.
Review general ledger activity for unusual entries.
Review monthly financial statements for unusual variations.
Review bank reconciliations, and compare to general ledger.
Examine accounts receivable reconciliation to general ledger balance.
Review client physical inventory method.
Discuss with client the policy for valuing inventory and identifying obsolete inventory

items.
Discuss with client the procedures for obtaining a proper year-end cut-off.
Review depreciation schedules, and recalculate a sample of the depreciation expense

figures.
Review income tax returns.
Examine information relating to any capital stock or retained earnings transactions for

the past year.

Review minutes of board of directors' meetings and stockholders' meetings for unusual

or material matters.
Read lease agreements.
Review past audit reports.

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6. A company may not want its CPAs to audit a client's records because the auditors gain a
substantial amount of competitive information during an audit. However, CPAs are bound
by confidentiality under the AICPA's Code of Professional Conduct.

Also, a CPA's

knowledge of the industry gained from having several clients in the same industry
provides him or her with insights he/she may not have otherwise had.
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