Question
GAAP Departure Facts: It is mid-March, 2018 and you are concluding an annual audit of a client's December 31, 2017 financial statements. The client insists
GAAP Departure
Facts:
It is mid-March, 2018 and you are concluding an annual audit of a client's December
31, 2017 financial statements. The client insists the year-end allowance for doubtful
accounts is properly stated at $1,000,000. Your audit firm strongly believes the
allowance should be $10,000,000 and having a reserve of only $1,000,000 would be a
pervasive departure from GAAP.
The client angrily asks: Why is this coming up at the last minute?
The annual audit fee is $125,000. Your firm has always sent an invoice for the audit
fee as soon as the audited financial statements are released @ the end of March.
The client informs you that they will not change the reserve and if your firm issues a
report with a pervasive GAAP departure, they will terminate your firm and refuse to
pay the fee. The Company has significant bank debt & the banks rely upon the
audited financial statements in deciding to continue / amend the banking lines of
credit.
Questions:
1. What kind of report should your audit firm issue?
2. What might your audit firm have done to avoid the "Why is this coming up at the last
minute?
3. For the future, what changes could you make to your billing policies to minimize the
likelihood of a client using the unpaid annual fee to intimidate your audit firm into
changing its audit report?
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