AU Section 315 Communications Between Predecessor and Successor Auditors . 01-. 13Using the facts from the ZZZZ Best case and professional guidance from AU Section 315, explain the following: A. As the successor auditor, what was E&W supposed to do before they accepted ZZZZ Best as an audit client in regards to Greenspan? Summarize in enough detail AU 315. 03-. 06. In your answer give and support your opinion as to whether or not E&W violated these paragraphs and if you can prove it as a fact.
The first thing E&W should have done, as the successor auditor, was to postpone accepting the engagement until the communications in paragraphs . 07 through . 10 have been evaluated. (AU 315. 03) It is the responsibility for the successor auditor to contact the predecessor auditor and hold any information exchanged about ZZZZ Best confidential (AU 315. 06). It is important for the successor auditor to contact the predecessor auditor because they may be able to provide information that will assist the successor auditor in determining whether or not to accept an engagement.
AU 315. 07) The successor auditor should request permission from the prospective client to make inquiry of the predecessor auditor prior to acceptance of the engagement.
If the client refuses, the successor should inquire as to why the client is refusing (AU 315. 08). The successor auditor should make inquiries regarding matters that will help the successor auditor determine if they were to accept the engagement and the predecessor auditor should respond promptly and fully. (AU 315. 09 and AU 315. 0) In my opinion, E&W did violate the standards of what a successor auditor should do regarding the contacting of a predecessor auditor in the case of the ZZZ Best audit. I believe this to be true because Mr. Greenspan (predecessor auditor) testified before Congress that E&W never got in touch with him regarding the restoration contract and the audit that Greenspan performed in general. Since it is normal protocol for the new auditor to contact the old auditor, Greenspan never contacted E&W. However, I cannot prove that E&W never contacted Greenspan since E&W claimed they contacted Greenspan.
They were not required to disclose the nature of the communication because the information that was transferred between the predecessor auditor and successor auditor is to be kept confidential (AU 315. 06). Since Congress did not recall Greenspan to rebut E&W, proving E&W did not communicate with Greenspan would be difficult. E&W should have contacted Greenspan in writing. E&W did so when they contacted Price Waterhouse and this eliminated any doubt whether contact was made. This same contact between the predecessor and successor auditor should also have been documented.
B. Why does a successor auditor need to contact the predecessor auditor? What could the predecessor auditor tell them? Summarize AU 315. 07-. 09. Did Greenspan know anything about ZZZZ Best that might influence E&W’s decision to accept ZZZZ Best as a client? Defend your opinion with information from the case. AU 315. 07-. 09. emphasizes the importance of communication between the predecessor and successor auditors prior to a final engagement between the successor auditor and the prospective client. AU 315 . 7 states that gathering information from the predecessor auditor is a critical step of the engagement process because this can provide valuable insight in terms of accounting and auditing disagreements with the former client.
For Instance, it does not appear that information that could have been provided by Greenspan to E&W would had ultimately change the fact that they decided to work with ZZZZ Best since, at the time, there was no record of Greenspan having any type of disputes with his former client. Furthermore, AU 315 . 8 states that the successor auditor is to make an inquiry to the potential client regarding information obtained by the previous auditor. However, the predecessor auditor does not have the obligation to disclose confidential information gathered from his or her former client unless approval has been granted by the client. There is no record that ZZZZ Best management forced Greenspan to sign a confidentiality agreement, so this would not be a factor in E&W’s ultimate decision to work with ZZZZ Best. AU 315 . 09 specifies the type of information inquiries that a successor auditor would make to a predecessor auditor.
This type of information would help the successor auditor access the overall integrity of the potential client. Referring to the ZZZZ Best Case, there was no information that E&W could have gathered from Greenspan that would have shown a negative light on the integrity of ZZZZ Best Management. Overall, it is clear from reading the case that E&W did not put much emphasis on gathering information from Greenspan since, at that particular time, the company had a good reputation. Greenspan had been deceived by his former client, so the potential information would have been highly unreliable.
C. As the predecessor auditor to Price Waterhouse, did E&W follow the professional standards in paragraphs . 03-. 10 in their communications with Price Waterhouse? In your answer using guidance and details from the case, explain what E&W was supposed to do and what they did do (did they follow the standard or violate a part of the standard guidance? If so, then which part? ). Especially address under what circumstances is a predecessor auditor allowed to give a limited response and what limited response is allowed by the standards in paragraph . 10.
What does a limited response mean to the successor auditor? There is no question that E&W failed to follow multiple professional standards. E&W should have communicated to Price Waterhouse the fact that his former client refused for a long time to have its contract sites inspected, which is a typical auditing procedure. This is a direct violation of AU315. 09 and it would have probably played a factor in Price Warehouse’s decision to work with ZZZZ Best. Furthermore, E&W discovered that its former client, CEO Mr. Minkow, had previously been involved in credit card fraud. They also discovered that Mr.
Minkow had approved an article in the Los Angeles Times reporting fictitious profits. Lastly, E&W collected a reasonable amount of information regarding the fraudulent activities that were taking place at ZZZZ Best. Despite all the relevant information gathered by E&W, they failed to inform Price Waterhouse as well as failed to apply professional standards ( AU315. 09). Even though E&W was not obligated to release any information covered by the confidentiality agreement related to the construction sites, the firm appears not to have disclosed the fact that its response was limited by this event, which is violation of AU 315. 0. Instead, in the meeting with Price Waterhouse, they stated that their firm no longer wanted to be involved with ZZZZ Best’s financial statements. D. Did Price Waterhouse as the successor auditor follow the substance of the standard?
Did they do what they should have done or what the standard allowed them to do? In your answer address why successor auditors are supposed to contact predecessor auditors, and what a limited response should mean to them. Your answer will include what they were supposed to do according to the guidance provided for the successor auditor in paragraphs . 01-. 0, and what they actually did using facts from the case. You need to integrate the standard guidance with Price Waterhouse’s actions. Price Waterhouse appeared to have followed most of the professional standards. It is unclear from reading the case whether the firm requested permission from ZZZZ Best to inquire about the confidentiality agreement or they just decided to ignore this critical piece of information prior to making the final decision to work with the prospective client. Perhaps, Price Waterhouse should have done a deeper investigation into the integrity of ZZZZ Best management before agreeing to work with them.
On the other hand, Price Waterhouse followed proper protocol by reaching out to E&W. It appears that their predecessors withheld a lot of information or provided deceiving information based on the fact that they could have been legally accountable for their lack of professional capability when faced with complex situations. For instance, it appears that E&W did not clearly state in writing or verbally that there were limitations as to the amount of information they could release to Price Waterhouse. Question 2: 15 points AU Section 336 — Using the Work of a Specialist . 1-. 16When E&W auditor, Larry Gray, visited job sites, he was accompanied by two specialists, Mark Morse and Mark Roddy, who were provided by Tom Padgett. Was Gray correct to use the specialists provided by the client or someone else related to the client? In your answer use and refer parenthetically to the standards to state: A. When and if specialists can be used, and the auditors responsibility to assess the credentials of the specialist. The auditor is not expected to have the knowledge outside of general business practices.
It is impossible to expect the auditor to have the knowledge required to evaluate every type of business. In the case where such outside knowledge is required to evaluate material effects on the financial statement, an auditor may need to acquire a specialist to help him/her evaluate the business practices or contracts (AU 336. 06). The professional certification, license, or other recognition of the competence of the specialist in his/her field should be examined by the auditor, along with considering the specialists reputation and work experience in the field (AU 336. 8). In this case, Gray was correct to use an auditor because he did not know the carpet cleaning business as an expert would know. Gray lacked the expertise to detect the difference between a restoration site and a new building that was being constructed. This clearly demonstrates that Gray required a specialist in the business. Gray made a mistake in that he did not check the credentials of Morse or Roddy to see if they were qualified to give an opinion on the restoration or if they were just making statements to mislead him (which they were).
Gray made the mistake of thinking that the physical examination did not require the certification documentation. B. Whether or not a specialist may be provided by the client. The auditor must assess if the specialist has a relationship with the client that may affect the outcome of the specialist’s work. A specialist that does have a relationship with the client can still be used if the auditor feels that the specialist’s objectivity will not be impaired (AU 336. 10, 336. 11). C. What the auditor should do if the specialist is provided by the client.
It is certainly better if the specialist has no relationship and is not provided by the client. The specialist should be considered objective and reliable. However, if the specialist does have a relationship with the client the work may still be acceptable under certain circumstances. The auditor is required to assess the risk that the specialist’s objectivity may be impaired by the relationship. If this is found to be likely, then the auditor must perform additional procedures with respect to some or all of the specialist’s assumptions, methods, or findings to determine that the findings are reasonable.
If the auditor does not have the knowledge to accomplish this, then they must bring in another specialist (AU 336. 11). In this case, Gray was aware that Roddy was hired at Padgett’s suggestion. It was Gray’s responsibility to investigate if the two specialist’s relationship with ZZZbest would compromise their reliability and independence. Further investigation by Gray would have uncovered the compromising relationship between the client and the specialist, making the specialist views unreliable. 2. Summarize paragraphs . 12-. 16 to explain: A.
How the findings of a specialist may be used B. How the findings of a specialist affect the audit report and the guidance for reference to the specialist in the audit report. The auditor is responsible for understanding the specialist’s methods and assumptions as well as their application. They are to test the data provided by the specialist, and evaluate the specialist’s findings and related assertions in the financial statements. The auditor is also responsible for applying additional procedures if the auditor believes the findings are unreasonable.
If the specialist’s findings support the assertions on the financial statements, the auditor can conclude that sufficient competent evidential matter has been obtained. (AU 336. 12, 13). The auditor may use the findings of the specialist to add explanatory language to the auditor’s standard resort or departure from the unqualified opinion. Reference to the specialist may be made if the auditor believes this reference will give further understanding for the explanatory paragraph or departure from the unqualified opinion.
This is the only way that the specialist can be referred to in the auditor’s reports. Any unapproved mention of the specialist can mislead readers of the financial documents making them believe the report is more than an audit. (AU 336. 16). The auditor is responsible for the specialist’s findings if the auditor uses them in the financial statements and the auditor cannot state that they used the specialist in the financial statements unless mentioning the specialist can give further understanding in the financial reports.
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Communications Between Predecessor and Successor Auditors. (2016, Oct 17). Retrieved from https://graduateway.com/communications-between-predecessor-and-successor-auditors/