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e Company: The Lakeside Company Auditing Cases A LOOK INSIDE A CPA FIRM senio enga CTORY CASES The pro ac 1. INTRODUCTORY CA Chanman is located in the central partie 1979 and now employs 145 branches in nearby Virginia partners, 14 managers, 21 group concentrate in tax The CPA firm of Abernethy and Chapman is locate Virginia. This partnership began operations in 1979 and accountants out of a main office in Richmond and three branches es The Richmond office has 7 professionals: 10 partners 14 senior and 42 staff auditors. Eleven members of this group con offer a variety of consulting services to the firm's services while another seven offer a variety of consulting servi The others spend a majority of their time performing audits, other services, accounting and bookkeeping services. During busy occasionally have to move from one area of the firm to another. Eighteen employees comprise the secretarial and clerical staff of the Richmond present all of the firm's audit clients are non-public companies. However considering adding some clients that are publicly traded companies. cities. Thed 42 staff seven offer their time po. During by cities and 42nother severity of caling sery the firm i Services with spend a and bookkone area of audits, other assurance to another. Eighteen additional rical staff of the Richmond office. At mpanies. However, the firm is In hiring professionals, the firm considers only college graduates with a main in accounting and requires that each employee sit for the CPA exam within one year of employment. Once employed, all accountants in the firm must complete at least 4 hours per year of continuing education. Promotions within the firm are guided by seniority and technical competence. For example, for a staff auditor to be promoted to senior auditor, he or she must have been with the firm at least two years, must have passed the CPA exam, and must have demonstrated outstanding competence in job performance. DeAnna Malott, a partner in the Richmond office, monitors the quality control standards and the human resource policies of the firm. One of Ms. Malott's is to conduct training seminars for new professionals regarding the policies of the firm. Under these policies, employees must sever all financial ties to audit clients. Another of Ms. Malott's duties is to assign personnel to the various audit engagements of the firm. In making these assignments, she considers the employee's experience with the client's business, as well as his or her technical training. For audit engagements, firm policy requires the assignment of a consulting partner, as well as a partner-in-charge of the engagement. The partner-in-charge of the audit heads the engagement team, while the consulting partner advises and reviews the final work of the team. vonio carry oors perngagemately uring More me paren armor c onsiderable growth over the po emphasis on bigues. During the ones od marketing strategy and rated the increase in 2000,000 in gross partners accountingal year, the Richmoo in net income, 60% of the frother 25% of the leg. whead from $150,000 to Sments with tax services en services other and consulting The audit engagement team consists of a partner-in-charge, a manager: senior auditor, and one or more staff auditors. The partner-in-charge engagement has the definitive responsibility for decisions made during the even though he or she does not normally carry out the major activities The manager, senior auditor and staff auditors perform the majority of of normally carry out the major activities of the audit. procedures required by an audit. The assignment of an engagement team, as well as a consulting partner, is to ensure not only that audits are appropriately supervised also that there is complete obiectivity and competence in conducting each is complete objectivity and competence on Abernethy and Chapman as a firm, and the Richmond office in particular, has experienced considerable growth over the past five years. The partners believe that a good marketing strategy and a continuing emphasis on high-quality auditing and accounting services have generated the increase in revenues. During the most recent fiscal year, the Richmond office totaled over $7,000,000 in gross revenues while earning nearly $2.000.000 in net income. Profits accruing to individual partners ranged from $150,000 to $400,000. Traditionally, 60% of the firm's income has been derived from audit engagements with tax services providing another 25% of the total. Remaining revenues are generated by assurance services other than audits (e.g.. reviews), accounting and bookkeeping services (eg, compilations), and consulting services. The partners agree that assurance services (including financial statement audits) and consulting services offer the greatest potential for expanding the firm's income and have constantly stressed the growth of these services. Public company auditing is a prospective area for growth, but it brings new risks 1) 10 At present, Abernethy and Chapman has a number of large clients in the Richmond area: a small hotel chain, a group of furniture stores, several large car dealerships, and three of the local banks. Recently, the firm decided to seek additional clients. Therefore, within the last 18 months, a series of advertisements has been published in local newspapers as well as in several prominent Virginia periodicals. In addition, a monthly newsletter describing current accounting and taxation changes is distributed to clients and local business leaders. This marketing strategy was created by a Richmond advertising agency and has stressed the theme "We Are Here to Help Your Business. The entire campaign cost the firm approximately $200,000 and has just recently begun to generate additional revenues, dobos namo enerada b r amedA lo absolutoa vipo wa e ril one word babivora uplo Domonosom olgem on 20 word babivono mo l t bobaan al normoniloobs Scoisbria lotno brons Winner smo sve of been blow OY hold balupolno vloup to none oblems with these movements SUSTVO its With anaus Y le of 7 (5) The case stale area of the firm to another, services. Are there any potential problem EXERCISE and prepare Review the quality control standards of Aber a memo to Ms. Malott addressing the provided, how does the firm appear to me control standards? If additional information is you would need to have to make the improvements do you have for the firm elements of quality control as required of Abernethy and Chapman, and dressing the firm's policies. From the i ear to meet or not meet each of the a tion is needed, state what informa le to make the assessment. What recomm for the firm? Be sure to consider all as required by Standard of Quality C Control, issued by the AICPA leadership responsibilities, (2) relevante the information h of the quality what information recommendations for ider all of the Quality Control evant ation of clients, (4) human ethical Standards No. 7, A Firm's System of Quality Control is The elements are (1) leadership resp requirements, (3) acceptance and continuation of cli xii resources, (5) engagement performance, and (6) monitoring. (See template "IntroCase-1.doc) APPLY YOUR RESEARCH Use library resources such as searchable databases to research the following topic Write a report discussing marketing by public accounting firms. Indicate the reasons that marketing is permitted and the type of marketing (particularly advertising) that has occurred. Discuss the success that firms have achieved and the reaction of accountants to marketing, especially advertising. What are the restrictions on advertising by a CPA? CONSULTING PARTNER REVIEW The Prentice Hall website (www.pearsonhiahered.com/arens) includes audio clips prepared by the consulting partner on the audit team. This partner offers additional questions that require critical thinking about the subject material of the cases. You will listen to the clips. read any material related to the clips, perform additional research, and prepare additional memos or reports Bob Zimmerman will be serving as the consulting partner on the Lakeside Company audit engagement. In most of the subsequent cases, Mr. Zimmerman will be asking you additional questions about the audit of the Lakeside Company THE IMPACT OF SARBANES-OXLEY The case states that the firm of Abernethy and Chapman is considering the acceptance of clients that are publicly traded. What specific steps would the firm have to take before they could accept an audit client that is publicly traded? (2) Discussion question #2 above addresses audit engagement management, consulting partners and rotation. Discuss how Sarbanes-Oxley has affected these issues. e Company: The Lakeside Company Auditing Cases A LOOK INSIDE A CPA FIRM senio enga CTORY CASES The pro ac 1. INTRODUCTORY CA Chanman is located in the central partie 1979 and now employs 145 branches in nearby Virginia partners, 14 managers, 21 group concentrate in tax The CPA firm of Abernethy and Chapman is locate Virginia. This partnership began operations in 1979 and accountants out of a main office in Richmond and three branches es The Richmond office has 7 professionals: 10 partners 14 senior and 42 staff auditors. Eleven members of this group con offer a variety of consulting services to the firm's services while another seven offer a variety of consulting servi The others spend a majority of their time performing audits, other services, accounting and bookkeeping services. During busy occasionally have to move from one area of the firm to another. Eighteen employees comprise the secretarial and clerical staff of the Richmond present all of the firm's audit clients are non-public companies. However considering adding some clients that are publicly traded companies. cities. Thed 42 staff seven offer their time po. During by cities and 42nother severity of caling sery the firm i Services with spend a and bookkone area of audits, other assurance to another. Eighteen additional rical staff of the Richmond office. At mpanies. However, the firm is In hiring professionals, the firm considers only college graduates with a main in accounting and requires that each employee sit for the CPA exam within one year of employment. Once employed, all accountants in the firm must complete at least 4 hours per year of continuing education. Promotions within the firm are guided by seniority and technical competence. For example, for a staff auditor to be promoted to senior auditor, he or she must have been with the firm at least two years, must have passed the CPA exam, and must have demonstrated outstanding competence in job performance. DeAnna Malott, a partner in the Richmond office, monitors the quality control standards and the human resource policies of the firm. One of Ms. Malott's is to conduct training seminars for new professionals regarding the policies of the firm. Under these policies, employees must sever all financial ties to audit clients. Another of Ms. Malott's duties is to assign personnel to the various audit engagements of the firm. In making these assignments, she considers the employee's experience with the client's business, as well as his or her technical training. For audit engagements, firm policy requires the assignment of a consulting partner, as well as a partner-in-charge of the engagement. The partner-in-charge of the audit heads the engagement team, while the consulting partner advises and reviews the final work of the team. vonio carry oors perngagemately uring More me paren armor c onsiderable growth over the po emphasis on bigues. During the ones od marketing strategy and rated the increase in 2000,000 in gross partners accountingal year, the Richmoo in net income, 60% of the frother 25% of the leg. whead from $150,000 to Sments with tax services en services other and consulting The audit engagement team consists of a partner-in-charge, a manager: senior auditor, and one or more staff auditors. The partner-in-charge engagement has the definitive responsibility for decisions made during the even though he or she does not normally carry out the major activities The manager, senior auditor and staff auditors perform the majority of of normally carry out the major activities of the audit. procedures required by an audit. The assignment of an engagement team, as well as a consulting partner, is to ensure not only that audits are appropriately supervised also that there is complete obiectivity and competence in conducting each is complete objectivity and competence on Abernethy and Chapman as a firm, and the Richmond office in particular, has experienced considerable growth over the past five years. The partners believe that a good marketing strategy and a continuing emphasis on high-quality auditing and accounting services have generated the increase in revenues. During the most recent fiscal year, the Richmond office totaled over $7,000,000 in gross revenues while earning nearly $2.000.000 in net income. Profits accruing to individual partners ranged from $150,000 to $400,000. Traditionally, 60% of the firm's income has been derived from audit engagements with tax services providing another 25% of the total. Remaining revenues are generated by assurance services other than audits (e.g.. reviews), accounting and bookkeeping services (eg, compilations), and consulting services. The partners agree that assurance services (including financial statement audits) and consulting services offer the greatest potential for expanding the firm's income and have constantly stressed the growth of these services. Public company auditing is a prospective area for growth, but it brings new risks 1) 10 At present, Abernethy and Chapman has a number of large clients in the Richmond area: a small hotel chain, a group of furniture stores, several large car dealerships, and three of the local banks. Recently, the firm decided to seek additional clients. Therefore, within the last 18 months, a series of advertisements has been published in local newspapers as well as in several prominent Virginia periodicals. In addition, a monthly newsletter describing current accounting and taxation changes is distributed to clients and local business leaders. This marketing strategy was created by a Richmond advertising agency and has stressed the theme "We Are Here to Help Your Business. The entire campaign cost the firm approximately $200,000 and has just recently begun to generate additional revenues, dobos namo enerada b r amedA lo absolutoa vipo wa e ril one word babivora uplo Domonosom olgem on 20 word babivono mo l t bobaan al normoniloobs Scoisbria lotno brons Winner smo sve of been blow OY hold balupolno vloup to none oblems with these movements SUSTVO its With anaus Y le of 7 (5) The case stale area of the firm to another, services. Are there any potential problem EXERCISE and prepare Review the quality control standards of Aber a memo to Ms. Malott addressing the provided, how does the firm appear to me control standards? If additional information is you would need to have to make the improvements do you have for the firm elements of quality control as required of Abernethy and Chapman, and dressing the firm's policies. From the i ear to meet or not meet each of the a tion is needed, state what informa le to make the assessment. What recomm for the firm? Be sure to consider all as required by Standard of Quality C Control, issued by the AICPA leadership responsibilities, (2) relevante the information h of the quality what information recommendations for ider all of the Quality Control evant ation of clients, (4) human ethical Standards No. 7, A Firm's System of Quality Control is The elements are (1) leadership resp requirements, (3) acceptance and continuation of cli xii resources, (5) engagement performance, and (6) monitoring. (See template "IntroCase-1.doc) APPLY YOUR RESEARCH Use library resources such as searchable databases to research the following topic Write a report discussing marketing by public accounting firms. Indicate the reasons that marketing is permitted and the type of marketing (particularly advertising) that has occurred. Discuss the success that firms have achieved and the reaction of accountants to marketing, especially advertising. What are the restrictions on advertising by a CPA? CONSULTING PARTNER REVIEW The Prentice Hall website (www.pearsonhiahered.com/arens) includes audio clips prepared by the consulting partner on the audit team. This partner offers additional questions that require critical thinking about the subject material of the cases. You will listen to the clips. read any material related to the clips, perform additional research, and prepare additional memos or reports Bob Zimmerman will be serving as the consulting partner on the Lakeside Company audit engagement. In most of the subsequent cases, Mr. Zimmerman will be asking you additional questions about the audit of the Lakeside Company THE IMPACT OF SARBANES-OXLEY The case states that the firm of Abernethy and Chapman is considering the acceptance of clients that are publicly traded. What specific steps would the firm have to take before they could accept an audit client that is publicly traded? (2) Discussion question #2 above addresses audit engagement management, consulting partners and rotation. Discuss how Sarbanes-Oxley has affected these issues