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Case 8-6 Rhody Electronics: A Difficult Client (a GVV case)
Denise Norris is a manager at Fitch & Jones, LLP, a regional audit firm in Providence, Rhode
Island. Norris is preparing for a meeting with Alan Morse, the controller of Rhody Electronics, a
publicly held company in Providence. The meeting concerns a variety of questions raised by the
controller about the audit as follows.
• Why wasn’t $1 million revenue recorded in 2016 for a December 31, 2016, transaction
whereby Rhody agreed to sell $1 million of software to Ocean State Electronics in return for
a stock issuance of that company? Ocean State, in return, agreed to sell $1 million of similar
software to Rhody on January 5, 2017, in return for a stock issuance from Rhody.
• Why does the firm need to do additional testing of the collectability of receivables beyond
that included in the original audit plan?
Questions
1. What role should the client have in raising issues related to auditors’ planning and
execution of the engagement? Support your answer using ethical reasoning.
Clients have a right to question auditors when extra time is being spent auditing the financial
statements that, in the client’s view, is due to inefficiencies of individual auditors or relationships
between members of the audit team that might delay completion of the audit. The client has a
vested interest in seeing that the audit is completed on time and within the budget. Imagine, for
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2. Assume the controller is very defensive and fails to provide acceptable responses to the
questions raised by Norris. Norris is concerned about the ability of the firm to complete
the audit on time and under budget. She knows she has to do something to alleviate the
tension that has developed with the controller and ensure that the audit comes to a
successful conclusion. However, she is not sure how best to get it done. Answer the
following questions:
• What role does ethical leadership play in the way Norris deals with the conflict?
Consider how the way she handles the matter might influence the behavior of
members of the firm.
Denis Norris is a manager. She should discuss the contentious issues with the client with the
partner in charge of the engagement. Effective firm leadership dictates that it is the partner in
• What levers can Norris use to convince the controller of the need for better
cooperation to ensure successful completion of the audit?
Working with the lead partner on the engagement, Norris should respond to the points raised by
the controller as follows:
• Why wasn’t $1 million revenue recorded in 2016 for a December 31, 2016, transaction
whereby Rhody agreed to sell $1 million of software to Ocean State Electronics in return for
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• Why does the firm need to do additional testing of the collectability of receivables
beyond that included in the original audit plan?
Here, Norris has to explain to the partner why this is necessary especially since it may delay the
completion of the audit and go beyond the budgeted time in order to verify the collectability of
the receivables. The answer may lie in the questions raised by Norris in response to the questions
posed by the controller as follows:
• Why has the firm hired a consultant to help with the audit of the company’s
information systems?
Unless the client is being asked to pay more for the consultant, this is a decision of the auditors.
It could be that the information systems are not working as intended and Norris wants a second
opinion on the problem. Since audit firms are not permitted to engage in an information systems
• What are the most persuasive arguments Norris can make of the reasons and
rationalizations that may be provided by the controller in discussing/defending his
positions?
In addition to the points made above, Norris and the audit partner should address the question
Norris raised with the controller: Why did Morse request a staff member be removed from the
audit team citing irreconcilable “personality” differences? Typically, clients do not have a role to
play in staff decisions of audit firms. It is true that problems getting along with audit staff are fair
game for the client to raise, therefore Morse may be justified in raising the issue with Norris.
However, the audit firm should be careful not to bend to the client’s wishes simply because the
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