Question

Godwin, Key & Associates is a small, but rapidly growing, audit firm. Its success is largely due to the growth of several clients that have been with the firm for more than five years. One of these clients, Carolina Company Ltd, is now listed on the ASX and must comply with additional reporting regulations. Carolina Company Ltd’s rapid growth has meant that it is financially stretched and its accounting systems are struggling to keep up with the growth in business. The client continuance decision is about to be made for the next financial year. The managing partner of Godwin, Key & Associates, Rebecca Sawyer, has recognised that the audit firm needs to make some changes to deal with the issues created by the changing circumstances of its major client and the audit firm’s overall growth. She is particularly concerned that the audit firm could be legally liable if Carolina Company Ltd’s financial situation worsens and it fails. Required: (a) Provide guidance to Rebecca abou

Answer 1

Answer:

nahi pata. kahi aur dekh lo

Answer 2

The following questions are addressed based on the given case study.

Explanation:

Provide guidance to Rebecca about the steps she can take to avoid the threat of litigation if Carolina Company Ltd fails.

Answer:

There are several steps to take in order to avoid litigation (including client continuation decision considerations in part b below):

1. Recruiting competent employees

2. Regularly updating staff's knowledge through training

3. Ensuring that ethical standards are met

4. Ensure compliance with regulations governing audits

5. Ensuring that policies and procedures are implemented that:

• Accepting a new client requires following appropriate procedures
• Staff is allocated to clients according to their needs
• Identify and address ethical and independence concerns in a timely manner.
• Every aspect of the work is documented in full
• Before forming an opinion, adequate and appropriate evidence is collected.

6. Discussing any significant findings with a client's audit committee.

7. Reviewing the client's internal control procedures to determine if there are any significant weaknesses during the previous year's audit.

8. Obtaining and interpreting privity letter requests in accordance with AGS 1014 Privity Letter Requests.

What should Rebecca consider when making the client continuance decision for Carolina Company Ltd for the next financial year?

Answer:

• The decision to keep a client is crucial. Rebecca should assess and document the firm's capacity to support Carolina Company Ltd, as well as any other significant clients, in the following year. The methods to be followed for making the customer acceptance or continuation decision are outlined in APES 320 Quality Control for Firms and ASQC 1.

• Client integrity and any dangers to the auditor's compliance with the fundamental standards of professional ethics are the most important elements to consider (integrity, objectivity, professional competence and due care, confidentiality and professional behaviour). Despite the fact that Carolina Company has been a client for several years, the firm's integrity must be re-evaluated. Rapid expansion might put pressure on the client, even jeopardising its integrity. This is especially true in the case of Carolina Company, since its financial system is already showing signs of trouble.

• The audit firm's capacity to adhere to the fundamental standards of professional ethics is a serious issue.

• Given the firm's reliance on the huge client's revenues, Rebecca should be particularly concerned about the firm's capacity to be objective. Although Carolina Company is merely one of the big clients undergoing rapid expansion, fee reliance occurs when a client's fees account for a considerable amount of the audit firm's entire revenue. When this fraction approaches 15%, APES 110 gives advice on how to protect yourself.

• Rebecca should be concerned about the audit company's capacity to employ professional competence and due care in audits for quickly growing customers at a time when the audit firm is rapidly developing and the client's reporting requirements are changing dramatically.

• Are the audit firm's clients listed? Do they have the expertise to audit them? Are the stretched financial systems at Carolina likely to cause auditing issues? The decision to continue working with the client must be properly documented, and the engagement letter must clearly define the responsibilities of both parties.