Horace and Lee CPAs (H&L) is a medium-sized CPA firm that performs review and audit engagements for mostly privately held companies. H&L also has a tax group.

H&L is considering accepting a new client, Real Renovations Inc. (RRI). RRI is a small private construction company that reports its financial statements under ASPE and requires a financial statement audit to satisfy its two preferred shareholders. The preferred shareholders receive modest, annual dividend payments that are determined based on profitability.

 

The president and majority shareholder of RRI, Sam Real, is the nephew of one of H&L's assurance partners. Sam is very close to his aunt and is she excited that RRI will become one of her firm's clients.

 

Sam wants H&L to perform its annual financial statement audit and prepare its annual corporate tax return. RRI's previous auditor has retired. You, CPA, would be engaged for the 2019 fiscal year end.

 

You have been asked to consult Canadian Auditing Standards (CAS) and apply the relevant requirements to determine whether H&L should accept RRI as an assurance client.

 

You should make a preliminary recommendation on client acceptance, based on an analysis of at least four considerations from CAS. Be sure to also identify whether any threats to independence exist and, if so, how H&L should mitigate these threats or if the threats preclude client acceptance.

 

Question 1: Should you accept RRI as a client? (refer to the Canadian Auditing Standards to apply the relevant requirements)

 

Question 2: Are there any threats to independence? If so, how should you mitigate these threats OR if the threats preclude client acceptance