- June 6, 2020
Accounting Tax Audit Abstract
Thequestion in hand is whether Joe Josephs, CPA, was indeed anindependent auditor of the Lander Company and in such determinewhether as predecessor auditor he should meet with Tom Holstrum, CPA,the incoming independent auditor of the firm. An audit is theexpression of opinion on whether the financial statements to the bestof the auditor’s knowledge reflect a true and fair view of theCompany’s financial performance of the period stated. An Auditor issomeone who is appointed to examine, review and express an opinion onwhether the financial statements to his knowledge and may also reviewand express opinion on the internal control system. To determine therelationship of both parties, we shall look at the Engagement letteron record. Communication is vital in the auditing world, and as suchthere are requirements that should be met before an engagement isaccepted by an auditor (Cohen & Behren, 1973). These are thematters I have dealt with in my report.
Inyear 1, the beginning of operations, Joe Josephs, CPA, reviewedLander Company’s financial statements. However, in the yearfollowing the beginning of operations, the Lander Company hired TomHolstrum, CPA, to audit its financial statements. Should Tom meetwith Joe, and would Joe be considered as a predecessor auditor?
Thispaper will seek to establish the requirements that constitute anaudit engagement, the procedure to be followed when an incumbentauditor is replaced and the circumstances for the replacement. Indoing so we shall be able to provide concise evidence based advice onwhether Tom Holstrum, CPA, should meet with Joe Josephs, CPA. Thenature of Joe Josephs’ relationship with Lander Company, thecapacity in which he reviewed the financial statements are at thecore of the issue. On which basis are they to meet? Should thecompany be consulted before the two are to meet? What are the stepsthat are recommended to be taken in such instances is also lookedinto? To understand all this, I have delved into what constitutes anaudit, the requirements that must be satisfied before one is acceptedas an auditor, and the circumstances behind change of auditors. Thelaws behind these concepts are focused on from the legal code.
Inmeeting the requirements of the paper, I have analyzed therequirements for communication between auditors, the situations underwhich they should be conducted. Together with that, a sample of thequestions that the successor auditor may ask the predecessor is alsoprovided. These questions are based on Statement on AuditingStandards revision of April 2007.
Mostof my information I obtained online. It came mainly from the websitesof Government bodies, Regulatory authority in the relevant fieldsamong others. They are listed below
Public Company Accounting Oversight Board (PCAOB)
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Whena company engages an auditor, the terms of the agreement are statedout in the engagement letter. An Engagement Letter, details therelationship between the client (firm Landers Company) and theauditor (Tom Holstrum, Joe Josephs). It offers a look into theauditor’s scope of objectives. The auditor is either engaged tocarry out: (1) Integrated audit or (2) Audit of financial statements(Siegel & Shim, 2000). These two audits are very different innature and the opinion offered differs somewhat. An Integrated Auditis an audit whereby the auditor expresses an opinion on theeffectiveness of the internal controls of a company in addition toexpressing an opinion on the true and fair nature of the financialstatements (Blake & Gowthorpe, 2005). Audit of financialstatements is the examination of a firm’s financial statements andthe accompanying disclosures by an auditor and his or her expressionof an opinion on the true and fair view with regards to theperformance of the firm. The engagement letter also outlines theauditor’s responsibilities, and management responsibilities.
Accordingto the Statement on Auditing Standards, an auditor should not acceptan engagement until he or she has communicated with the previousauditor. The purpose of such communications is to enable the auditormake an informed decision (Moehrle & Moehrle, 2013). Thisinformation is held with the strictest of confidence by both auditorswhether the successor auditor takes the job or not.
TomHolstrum, CPA, when he was first approached to carry out the audit ofyear 2, year following the beginning of operations, should have askedthe following questions the previous auditors name, reason for thechange in auditors, the contact information of the previous auditor(location, telephone number, email address and the postal address)and if he may contact the previous auditor and a copy of the reportof the previous years’ audited financial statements. Thesequestions among others offer an insight into the potential behaviorof the soon to be client (Hopper & Uddin, 2012). After theinitial offer, Tom should with the prospective client’s permission,contact Joe Josephs, CPA.
Someof the questions that he should ask are such as
If he has any information that may bear on the integrity of the management
Any communication between him, management and those in governance about deficiencies and weaknesses in internal control systems
If there were any disagreements with management regarding audit procedures, accounting principles or any other significant material matters to the financial statements.
Any instances of fraud and if, any communication between him, management, the accused and the conclusion of the matter.
What, according to him, was the reason for the change in auditors?
Thesequestions are based on the Statement of Auditing Standards No. 112,Revised April 2007, to conform to the issuance of Statements onAuditing Standards No. 114. The predecessor’s quick response is ofthe imperative (Rathore, 2008).
Accordingto the Legal Code that governs audits and auditors, that is theStatement on Auditing Standards, the Financial Accounting StandardsBoard auditors should communicate (Kumar & Sharma, 2015). Thisis so as to enable them to carry out their work with utmostefficiency. The case of Tom Holstrum and Joe Josephs is tricky by themere fact that we do not have information on what exactly was statedin Joe Josephs’ engagement letter. Based on the assumption thatthere even was an engagement letter, and Joe Josephs, CPA, wasengaged in the capacity as an auditor, which would qualify him to bepredecessor auditor. Tom Holstrum, CPA, upon offer of services shouldrequest permission from the prospective client Lander Company, tocommunicate with the previous auditor who in this instance happens tobe Joe Josephs, CPA.
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