Discussion Questions

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1. The owners of Lakeside as well as the company’s bank may require that an independent CPA firm perform an annual audit because the CPA firm could have an independence issue. The CPA firm in that Lakeside wants to hire is also the auditors for Lakesides main financial bank. The bank is a “main” user of the report put out by Lakesides auditor and in this case would be that banks auditor too. The connection is too close for the CPA firm to pick up this client, it would be against the ethically code.

2. Abernethy and Chapman do not have in-depth understanding of the consumer electronics industry that Lakeside is a part of, therefore it would be an unethical and against the rules of conduct. Rule 201 in General Standards part 1 says, “undertake only those professional services that the member can reasonably expect to complete with professional competence”. As stated if the firm does not have a member or experience in the field of business the auditing firm should refrain from taking on that client. Could an auditing firm get by in auditing the books of an electronic company when their specialty is car dealerships, probably but as an auditing firm that has never done the audits for a client in this field it is unknown the way business is handled and the right protocol in that field. There is an ethical obligation for the firm to discuss the expertise needed for them about the industry the client is in.

3. Profit-sharing bonuses seem like an easy and nice incentive for the employee by the employer but they bring along a lot of drawbacks and as an auditing firm open up a door for a red flag. There are very strict rules when adopting a profit-share policy that must be approved by the IRS and meet their guidelines. There is also a limit to the amount that employers can contribute to the plans. These guidelines are changing from year to year and it would be something else Abernethy and Chapman would have to keep up on as well as make sure Rogers is doing the right thing. There is a lot of area for fraud here and as an auditing firm a section that would need to be under close watch.

4. If Rogers wanted Abernethy and Chapman to assist them in developing systems it would depend on a few factors. Abernethy and Chapman would be able to help develop the systems if Lakeside stays a private company. If Lakeside is a publicly traded company Abernethy and Chapman would have an independence issue if it was both the auditor and helping to develop systems for output.

5. If Andrews was assigned to visit the headquarters/warehouse some of the things a tour of the client’s facilities is helpful in obtaining a better understanding of the client’s business operations because operations because it provides an opportunity to observe operations firsthand and to meet key personnel. By viewing the facility you can view assets and interpret accounting data related such as inventory and some of the factory equipment.

6. There are a few reasons that Lakeside would not want to hire a CPA firm that has clients in the electronics industry, one of them being if Lakeside would not get as good of a report as the other electronics, it is very each for stakeholders and investors to see which company is better. Second, Lakeside may feel the auditor isn’t necessarily on their side, even though as an auditor we need to stay neutral and that our obligation is to the stakeholder in the company.

List the fraud risk factors that the CPA firm might encounter if they accept
this audit engagement. Be sure to include a discussion of all items that will probably require special attention during the audit. For each of these fraud risk factors, indicate how the auditor should follow up on each potential problem if the engagement is accepted. Use the following formal Fraud Risk Factors

Auditor Follow Up
Material misstatement that existed on reporting historical cost on the new building. Approach this subject right away and speaking with the previous auditors for what they experienced on this issue. Rogers Corporation to construct the latest facility for Lakeside This issue needs more information and legal terms on whether or not this is allowable. The audit option that was rendered on the books for year ending in 2011 With Rogers refusing to write down the reported value of the property can cause some confliction between any auditor and owner. Talking to Rogers and the previous auditor is the best way to get to the bottom of this issue and see who is at fault. Not as much of a fraud but Rogers growth plan could run the company into the ground Because Rogers was annoyed with the last firm because of stifle to his growth plans, as an auditing firm we need to figure out what is best for the company and determine whether his attitude towards not changing his growth plan would be an issue. Why does more capital from being a publicly traded company help the company out There is nothing in the description that would give us as the firm an indication that having more capital will improve the position of the company. Growing and building more stores does not fix the problem. Coming to a determination on stock options will be crucial before taking this client on.

The threat of closing the newer building near the strip mall. This brings up the factor that if the company is close to closing a store before they are even our client, their future looks slim. If this is the case do we want to have a audit report of “we think this business will fail in a few years” That’s not good business all around Rogers uncertainty about surroundings

The fact that there were two electronic businesses that went out of business in the same town as him and he didn’t know the reason, makes me a little
worried if he isn’t going to pay attention to his surrounds like this. I would approach this subject with our partners and Rogers before taking on this client. Does auditing them and also being the auditor of the bank they finance through become an independence problem? There would be an independence issue here that would need to either be resolved or conclude in not being able to have Lakeside as a client Abernethy and Chapman’s inexperience in the field of electronics Abernethy and Chapman should discuss with Lakeside their inexperience and explain to them how they plan on gaining experience

Profit-Sharing Bonuses

Profit-Sharing bonuses bring up a huge fraud risk and Abernethy and Chapman need to make sure they deal with this issue and either get Rogers to cut the plan or work out in great detail how it will work.

King and Company
Certified Public Accountants
Richmond, Virginia


To the Stockholders
Lakeside Company

We have audited the financial statements of Lakeside Company as of December 31, 2011 and also have observed the operations and internal controls of Lakeside.

Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in compliance with U.S. GAAP. This includes the design, implementation, and maintenance of internal control pertaining to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to give an opinion on Lakeside’s financial statements based on our audits. We must conduct audits in accordance with auditing standards generally accepted. Those standards require that we plan and perform audits to reasonable obtain sufficient evidence that gives us the best assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. All these procedures depend on the auditor’s judgment. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Lakeside Company has chosen not to value their latest store with accordance to guidelines established by the FASB. We strongly believe that the value of Lakeside’s $186,000 investment in their sixth store should be impaired. The continuing failure of the shopping center makes the fate of the Lakeside store appear uncertain to us. The president of Lakeside, Benjamin Rogers, continued to report this asset based on historical cost, and not fair value. Because of this, we feel that a material misstatement exists and thus, we issued a qualified opinion.

In our opinion, except for the material misstatement with this investment, as mentioned in the preceding paragraph, the financial statements of Lakeside Company appear to be fairly stated with accordance to GAAP. Lakeside’s operations and cash flows seem to be in conformity with GAAP for the year ended December 31, 2011.

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