Assume No Pandemic and the Economy is good: You have graduated Rutgers and are now working on the audit staff for a large accounting firm, 5073 Associates. You are assigned to your first engagement the audit of WASSERMAN FORD DEALER INC.s financial statements for the year ended December 31, 2022. It is August, 2022, and you are in a planning meeting with the manager on the engagement, the senior and another staff person that has one more year experience than you. Everyone on this years engagement (except you) was assigned to the engagement last year. At the planning meeting, the manager (FRANK) on the engagement states the following: Last year (2021 financial statements) was the first year we audited WASSERMAN FORD DEALER, INC. Last year our fee was based on the standard hourly rates of the personnel working on the engagement multiplied by the number of hours worked. The total fee came to $150,000. Evan Wasserman, the owner and sole stockholder of WASSERMAN FORD DEALER, has told me (FRANK) if 5073 Associates wants to be the auditor in 2022, then the fee cannot exceed $130,000. The Partner and I have agreed that fee for the audit of WASSERMAN FORDs financial statements will not exceed $130,000. If the actual hours worked times the applicable billing rates is less than $130,000, than the client will be billed the lesser amount. If the actual hours worked times the applicable billing rates is more than $130,000, than the fee will be capped at $130,000. We know that there is a learning curve when we take on new clients, so this year (our second year auditing WASSERMAN FORD), we hope we can perform the audit in less hours. WE MUST BE MORE EFFICIENT. I have prepared a budget stating how many hours I believe each of you should be spending on each account. Unless there is a VERY GOOD reason why it took you longer to complete the tasks, I expect you to complete the tasks within the budgeted hours. FRANK also gives YOU some literature about Accounting for Auto Dealerships and tells you he expects YOU to learn it. 5073 Associates is now planning the audit for the second year. NOTE: If you look your textbook on page 214 under Fee Arrangements there is more information on how Firms quote fees to clients. The manager also tells the meeting participants what he has learned about WASSERMAN FORD since the last audit and certain facts about the Auto Dealership Industry: Ford Motor Company in Detroit requires an audited financial statement of WASSERMAN FORD within 120 days of WASSERMAN FORDs year end. Ford Motor Company requires all Dealerships to maintain a current ratio of at least 2 to 1. WASSERMAN FORD buys all its cars from Ford Motor Company in Detroit. As Each car is purchased, WASSERMAN FORD debits Inventory and credits Notes Payable. Each Note Payable to Ford is secured by the car that was purchased. When WASSERMAN FORD sells a car to a customer, the proceeds of sale are to be used to pay off the related Note Payable to Ford Motor Company. If the Current Ratio is below 2 to 1, Ford Motor Company has the right to increase the interest rate on its Notes by 0.5%. WASSERMAN FORD earns income on the sales of cars and also on the sales of service maintaining and fixing cars. During 2022, WASSERMAN FORD changed the method in which they compensate certain of its employees. The Service Representatives (the person a customer sees when they bring their car in for service) for WASSERMAN FORD are paid a base salary plus a commission for the amount of service revenue they generate. The Mechanics in the garage are also paid a base salary plus a share of the revenue they generate. WASSERMAN FORD is involved in significant litigation regarding several employees who were terminated during 2022. These employees are suing WASSERMAN FORD for wrongful termination. While Evan Wasserman believes these employees deserved to be terminated, he believes it is probable that WASSERMAN FORD will have to pay some amounts to these terminated employees. WASSERMAN FORD has significant fixed assets on its balance sheet since WASSERMAN FORD owns the Dealership Building as well as the Car Service Center next door. In prior years, WASSERMAN FORD used the double-declining balance method. But the controller told Evan Wasserman that the financial statements would look better if WASSERMAN FORD changed its depreciation method to the straight line method. This change in method resulted in a material reduction in depreciation expense in 2022 and WASSERMAN FORD has the proper disclosures in the notes to financial statements. WASSERMAN FORD has invested in a company RUTGERS AUTO BODY, INC. WASSERMAN FORD paid $100,000 for a 15% interest in Rutgers Auto Body. Evan Wasserman told FRANK that WASSERMAN FORD plans to value this investment at Fair Value since that is a requirement of Ford Motor Company. 5073 Associates Management Consulting Division recently did a cost savings study for WASSERMAN FORD and 5073 recommended certain cost savings measures. In accordance with the contract, 5073 was paid $45,000, which was 30% of the $150,000 savings which WASSERMAN FORD realized. YOU tell FRANK I know this is my first audit and I just started with 5073 Associates a few weeks ago. But I learned something at Rutgers about more efficient audits. If we test controls and find that they are very effective, we would be able to assess control risk at low, and therefore perform LESS substantive procedures. This could reduce our overall audit time. YOU tell FRANK I know this is my first audit and I just started with 5073 Associates a few weeks ago. But I learned something at Rutgers about more efficient audits. If we test controls and find that they are very effective, we would be able to assess control risk at low, and therefore perform LESS substantive procedures. This could reduce our overall audit time. You then get involved in discussing the Inherent Risks regarding the EXISTENCE and VALUATION of WASSERMAN FORDs Inventory. FRANK shows you the Financial Statements of WASSERMAN FORD as of and for the seven months ended July 31, 2022.

Current assets - $10,000,000; Total assets --- $25,000,000; Current Liabilities --$5,000,000; Total Liabilities -- $20,000,000; Total Revenues -- $25,000,000; Total Equity (assets less liabilities) -- $5,000,000 ; Income before taxes-- $3,000,000.

The above numbers are INTERIM numbers (You may have to extrapolate to get projected annual results). FRANK say he wants YOU to provide a Quantitative Materiality number and explain to him how you derived it. During your year end field work: During the first week of field work: Evan Wasserman says his door is open to the entire staff. You want to ask him a question and when you get to his office the door is shut but you hear some screaming. Evan Wasserman is screaming, FRANK WE SET THE FEE AT A MAXIMUM OF $130,000. I DONT CARE WHAT ISSUES YOU COME UP WITH DURING THIS AUDIT. YOU ARE NOW FAMILIAR WITH HOW OUR COMPANY WORKS. MY STAFF KNOWS WHAT THEY ARE DOING AND LAST YEAR THERE WERE NO ISSUES OTHER THAN 5073 WAS NOT FAMILIAR WITH OUR BOOKS AND RECORDS. THERE IS NO WAY I AM GOING TO PAY 5073 ASSOCIATES ANY EXTRA MONE. I SUGGEST YOU JUST CUT OUT SOME AUDIT PROCEDURES. MOST OF THEM ARE A WASTE OF TIME ANYWAY. During the second week of field work: The staff is about to complete its audit relating to the cost assigned to car inventory. The company has given you an analysis of inventory turnover by car model. The schedule shows that for all car models, the inventory turnover in 2022 and 2021 is 6.0except for the Ford Mustang convertibles. The turnover in 2021 for the Mustangs was 6,0. In 2022, the turnover for the Mustangs was 2.0. The Company has 50 of these cars in its inventory at December 31, 2022. During the third week of field work: You are looking at Sales of Parts (a portion of revenue earned by the Service Department) in the sales journal. You ask the client to print out a schedule by customer. You find that 50% of the Parts Revenue is earned from Rutgers Auto Body. The CFO calls you into his office and says You know, for a first year person, you seem to know your stuff and handle yourself pretty well. How would you like to work here. I will give you $15,000 more than what 5073 Associates pays you. When you walk out of the office, The CFOs executive assistant tells you The CFO really took a liking to you. Too bad the CFO may not be here in 6 months. In fact, many of us may not be here in 6 months since there is a rumor that Evan Wasserman is planning to sell the dealership. Who knows if the new owner will keep us on. Some additional facts:Last years audit strategy was to do only substantive procedures. From what 5073 Associates has learned from its audit last year, Management of WASSERMAN FORD has great integrity. Last years workpapers show that WASSERMAN FORD. has a good accounting staff but does not have proper segregation of duties. And last year your understanding of internal controls revealed that internal controls were weak. There were significant deficiencies and material weaknesses in internal control over financial reporting noted in 2021. The staff and the responsibilities of the staff are the same in 2022 as 2021. The CFO tells FRANK that none of the significant deficiencies and material weaknesses were addressed during 2022. WASSERMAN FORD DEALER, Inc.s accounting staff prepares all schedules supporting the financial statements. Your Firm just audits them. These schedules become audit workpapers once Auditors put tick-marks and comments on them. THERE IS NOTHING WRONG WITH CLIENTS PREPARING SCHEDULES SUPPORTING THE ACCOUNT BALANCES. An unmodified opinion was issued on 2021 financial statements. While last years audit uncovered some misstatements, none of them (individually or when totaled) were deemed material. There was substantial information put in the permanent file workpapers last year. In 2021.

YOUR PAPER TOPIC Based on the facts discussed above, what are some issues that should concern 5073 Associates, YOU, and the rest of the audit team, and how should 5073 Associates, YOU, and the rest of the audit team address these issues. As you are reading the case and deciding what to write in your paper, Keep in mind:The not to exceed fee. Ethics, code of conduct violations, and independence and any safeguards that may be relevant.

Fraud Risks that you believe may be relevant. 5073s report on the financial statements Your proposed audit strategy. Note disclosures. Risks of material misstatement