Accounting review of a case
sady-ashford
case_3.docxChristine, one of 3 partners at Leroux, Chagny, and Valerius (LCV) has a client, Angel of Music, Inc.,. LCV performs audit work as well as assist with tax preparation. Angel of Music, Inc.’s fees equate to $50,000 of LCV’s $1.4 million annual revenues. Because a client with a significant debt declared bankruptcy, Angel of Music is experiencing cash flow problems. Christine permitted Angel of Music to pay their $50,000 in fees over a 10-month time period. In 2013, Angel of Music was attempting to increase their line of credit, and the bank requested audited financial statements from 2012. Christine assigned audit senior, Erik and audit manager, Raoul to the engagement as she had much confidence in their work. Erik and Raoul planned the audit and Christine signed off on the audit plan without thoroughly reviewing their work. While doing the audit, Erik and Raoul determine that Angel of Music, Inc. has a going concern risk. When Christine learns of this, she realizes that Angel of Music still owes $25,000 in fees to LCV for work performed in 2011.
Issues:
1. Independence
2. Integrity and Objectivity
3. Auditing Standards
4. Due Professional Care
Rules :
1. AICPA Code of Professional Conduct. Section 100. Rule 101 – Independence - CPA members in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.
2. AICPA Code of Professional Conduct. Section 100. Rule 102 - Integrity and Objectivity - In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
3. PCAOB Auditing Standards. AU 110.02- Responsibilities and Functions of the Independent Auditor: The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.
4. AICPA Code of Professional Conduct. Section 300. General Standards Rule 1. (a) Professional Competence. Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence. (b) Due Professional Care. Exercise due professional care in the performance of professional services. (c) Planning and Supervision. Adequately plan and supervise the performance of professional services. (d) Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.
5. PCAOB Auditing Standards. AU Section 325 Communications About Control Deficiencies in an Audit of Financial Statements.
Application:
Even though the flaw was initially unknown, now that it has been uncovered, it is LCV’s responsibility to rectify the issue or report as is, and produce more accurate statements to present to the bank. Christine should not accept additional work when she already has other deadlines. Erik and Raoul had no information regarding a credit agreement of the audit fees outstanding. Christine should appropriately record company agreements or file them where they are easily accessible. Accepting the Angel of Music assignment while simultaneously tackling other pressing deadlines led Christine to carelessly review the audit plan and miss important information, and forget to appropriately record the credit agreement. Additional resources should be sought when similar situations arise.
Conclusion:
Although the flaw in the planning of the audit was unintentional, now knowing that the flaw existed, Christine and LCV would not be acting with integrity if they continue to ignore this flaw. The relevant ethical standard for Christine and LCV would be to come forward and be open and honest about the flaw and overlooking this during the planning phase. While this may hurt the reputation of Christine and LCV, it is better than covering it up and it coming out down the road which could really destroy Christine and LCV’s reputation. Due to the fact that LCV has monetary interest due to outstanding fees that is owed by Angel of Music, Inc. for work performed, LCV would be unable to reach an objective audit conclusion regarding their going concern. We feel that if the bank knew of the outstanding fees due to Christine and LCV their decision regarding the amount of money they would be able to borrow would be reduced or maybe they would not have the financial standing to borrow the money at all. Because the company is having financial troubles the bank would probably not put themselves at risk of losing money.
References
AICPA. Code of Professional Conduct. (2015). Retrieved from
Public Company Accounting Oversight Board. (2015). American Institute of Certified Public
Accountants, Inc. Retrieved from http://pcaobus.org/Standards/Auditing/Pages/AU110.aspx
Public Company Accounting Oversight Board. (2015). American Institute of Certified Public
Accountants, Inc. Retrieved from
http://pcaobus.org/Standards/Auditing/Pages/AU325.aspx
