Katrina Lukacs is the engagement partner of the audit of Champion Securities, an investment company. Most of Champions assets and liabilities are financial and their valuation is critical to the assessment of the companys solvency and profitability. Katrina has employed two outside experts to value the financial assets and liabilities because they are extremely complex to value, particularly the energy market derivatives and the instruments traded in foreign markets. In addition, the valuations are highly dependent on market conditions and the specific and detailed requirements of the recently revised accounting standards.

Throughout this years audit, Katrina has had difficulties with the CEO of Champion Securities. He is vehemently opposed to any asset writedowns she has suggested. The CEO has the backing of the chair of the board and Katrina has been unable to get the CEO to listen to her concerns about the valuations of the financial assets and liabilities the company has made. In past years, Katrina has had an amicable relationship with both the CEO and the chair, and the audits have run very smoothly. Katrina has now realized that this harmonious relationship was mainly due to the boom in the market. It was unlikely that there would be arguments about writing up the value of the companys assets during these good times.

Katrina, with the help of the experts, has prepared a summary of the relevant items, detailing the revised values for the assets and liabilities and the associated effects on income and retained earnings. The CEO has dismissed this summary and the audit recommendations with the comment, The market has hit bottom and is recovering. There is no need to show these writedowns because by the time the financial statements are published the values will be back to where they were before the market fell. It is all a waste of time. In fact, I think you are just being difficult to deal with. I think we need an auditor who is a bit more realistic.

Which of the following are true in this situation? (Several choices may be correct.)

A. Katrina may not wish to upset the CEO any further in case the audit firm loses the audit, which may create a self-interest threat.

B. The CEO appears to be intimidating Katrina in an effort to get her to agree to his valuations. The CEOs statement I think we need an auditor who is a bit more realistic, could be interpreted as an intimidation threat to replace Katrina, and her firm, with another auditor who would agree with his valuations.

C. Katrina should comply with the CEOs request as the value will come back when the market rebounds.

D. Katrina should resign from the audit as she cannot be independent any longer.

E. Katrina should ask another partner at the audit firm to review the case and join her in dealing with the CEO.

F. Katrina should refer the matter formally to the clients board and/or audit committee.

G. Katrina should insist that this adjustment be recorded because it is clearly an error.

Please answer the question by answering which choices are correct ?