Mobey Chan He is now a senior audit manager in Westford & Co, a medium size CPA firm in Orange County. He works in the audit quality control department of the firm. His role includes performing internal reviews of audits performed by his colleagues. 

This year, Westford is subject to PCAOB inspection. The managing partner is a little nervous of the visit by the PCAOB inspection team on June 1, 2021. On May 1, 2021, the managing partner of Westford asked Ed to review the audit work performed on Riverside Inc. for the financial year ended March 3,1 2021.

Riverside Inc. is a publicly traded company operating in the construction industry. The company complies with corporate governance regulations and has an audit committee. Riverside Inc. has been an audit client of Westford & Co for eight years, and Bob Newman has been the audit engagement partner during this time. Riverside’s audit was completed on April 30, 2021. The report contained a clean opinion.

 After two weeks of review of audit files related to the engagement with Riverside, Ed has learned a lot. First, it is apparent from Ed’s review that almost all of the detailed review of the audit working papers was completed by An Kinetong, who has evidenced her review by stating ‘final review’ on each page of the audit file. She has recently been promoted to audit manager.

 Second, Westford & Co requires its staff to record each hour they spend working on each client in the firm’s time management system. From reviewing the time records relating to the audit of Riverside Inc., Ed knows that Bob and the other audit team members recorded the following amount of time on the audit:

 Bob Newman  – audit engagement partner               2 hours

Pat Candy         – senior audit manager                      6 hours

Ane Kinetong – audit manager                                  35 hours

Six audit associates                                                    130 hours

 Total time spent on audit                                            173 hours

 

 The total hours charged for the audit was 150 hours and total audit fee charged for the audit was $225,000.

 Ed is also aware that Bob Newman booked a total of 40 hours to Riverside Inc. in respect of non-audit work performed. The only information Ed can find in the documentation is that the non-audit work related to a ‘special investigation’. And the fee for the ‘special investigation’ was $890,000.

Why does the managing partner care about the PCAOB inspection? Assume that the audit engagement with Riverside is representative of all audits conducted by Westford. What’s the leverage of the firm?