Chapter 1 Homework Registration And Sec Practice Presents Hurdles

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A NOTE ON ETHICS, FRAUD, AND SOX QUESTIONS

The Lakeside Company: Auditing Cases, 12th edition, has been updated in

light of the accounting scandals of the early 2000s, the passage of the

Sarbanes-Oxley Act of 2002, and the renewed interest in ethics within the

accounting and auditing profession.

Sarbanes-Oxley issues have been incorporated in two ways. First, case

expansion through an initial public offering, and the resulting impact such a

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A NOTE ON RESEARCH ASSIGNMENTS

The “Apply Your Research” and “Consulting Partner Review” assignments

included at the end of several cases do not lend themselves to definitive

solutions that could be included in an instructor’s manual. The assignments are

simply not intended to be exercises in arriving at a predetermined answer.

Rather, the applications of the suggested readings have the following objectives:

– To provide a means for improving the writing skills of students. From all

reports, accounting majors too often leave college lacking in the basic

ability to compose and construct sentences and paragraphs. Accounting

and auditing (especially as one moves up in an organization) obviously

require skills other than the purely quantitative. Memos, reports,

– To introduce students to accounting and business journals as well as

other important publications. After college, students must be able to “keep

current” or their effectiveness will quickly decline. In most cases, this

– To develop the students’ ability to derive viable solutions to auditing

problems. Unfortunately, students in college often come to the belief that

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– To promote auditing research. In most of these library assignments,

students are provided with one or more resources as starting points for their

research. However, the instructor should always push the students to look

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INTRODUCTORY CASE

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

(1)

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 the audit program and supervised by the

senior auditor.

(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,

(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

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(4)

A national or international CPA firm might consider acquiring Abernethy and

Chapman for several reasons:

– Although only a regional firm, Abernethy and Chapman apparently has a

client base that includes a number of large clients in several different

Abernethy and Chapman might have several reasons for viewing an acquisition

in a favorable light:

– Frequently, the purchase price will be a considerable amount of money

– The smaller firm may have trouble dealing with increased competition from

– The regional firm may also desire the additional backup services offered by

large organizations. National CPA firms usually have experts in many

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

(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

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SUGGESTED ANSWERS TO EXERCISE

(1)

The question requires students to address all the elements of a quality control

system, as included in Statement on Quality Control Standards No. 2. In some

cases, students should recognize the need for additional information.

To: DeAnna Malott

From:

Date:

Re: Quality Control Standards at Abernethy and Chapman

Overview: I was employed by the firm of Abernethy and Chapman to review the

quality control standards within the firm. The following represents my evaluation of

these standards according to the six elements required by the AICPA.

Evaluation:

Standard Existing

Procedures

Recommendations Additional

Information

Needed

Leadership

responsibilities

The case does

not explicitly

The firm should have

policies in place that

What specific

policies does the

Relevant

ethical

Firm requires its

employees to

The AICPA’s

Code of

Professional

The case does

not mention

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Acceptance

and

continuation of

This case does

not address this

contr

ol standard.

It is important to

have many controls

when considering a

Human

resources

The firm

considers

experience and

technical

competence in

assigning

personnel to

audit

engagements.

The firm hires

only college

The firm requires

This appears to be a

reasonable quality

control.

This seems to be a

more than adequate

Many states require

10

40 hours of

The firm

promotion

procedures

that a minimum

The case does

not address the

issue of

Engagement

performance

The firm requires

that a consulting

partner be

assigned to each

The firm should have

a mechanism for

consultation with

authoritative

It is not clear from

the case how the

team documents

the work

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The firm seems

to have a clear

chain of

command and

adequate

supervision on

the audit. The

Monitoring

The firm has a

partner, DeAnna

Malott, assigned

A comprehensive

system of

documentation of the

The case does

not mention what

types of

Conclusion: The firm has many policies related to quality control standards.

However, the firm has room for improvement in many of the areas, particularly in

the acceptance and continuation of clients.

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SUGGESTED ANSWERS TO SARBANES-OXLEY QUESTIONS

(1)

Students should be encouraged to visit the PCAOB website

– Registration CPA firms must be registered to be associated with public

companies. The application for registration is an online process. There is a fee, it

is small relative to other costs of maintaining the registered status and changing

the nature of the firm to comply with PCAOB rules. Here is the fee structure from

their website:

– Inspection – The PCAOB operates a system of inspections and publicizes

the results, per its authority under the SOX Act:

– The Act provides that an inspection shall include at least the following three

general components:

– Regular inspections are on a three-year cycle, although smaller firms may

be less frequent. Special inspections can be required by the PCAOB.

– Maintenance of independence under PCAOB rules and SOX-proscribed

activities:

Proscribed activities under SOX (section 201):

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Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited

Activities.

It shall be “unlawful” for a registered public accounting firm to provide any non–

audit service to an issuer contemporaneously with the audit, including: (1)

The pre-approval requirement is waived with respect to the provision of non-audit

services for an issuer if the aggregate amount of all such non-audit services

provided to the issuer constitutes less than 5% of the total amount of revenues

paid by the issuer to its auditor (calculated on the basis of revenues paid by the

issuer during the fiscal year when the non-audit services are performed), such

services were not recognized by the issuer at the time of the engagement to be

non-audit services; and such services are promptly brought to the attention of the

audit committee and approved prior to completion of the audit.