Problem 10

Terms of Engagement (15 Points)

You are a partner with Jones and Company (the Firm) and you have recently been asked to perform an audit of Kilo Corporation (the Company) as of and for the year ended December 31, 2022. This audit will be the initial audit of Kilo Corporation and management of the Company has indicated that their bank has agreed for them to prepare their financial statements on the Tax Basis of accounting.

This method (the Tax Basis) of accounting is consistent with the financial reporting framework used in the preparation of the Companys internal financial statements which have been presented to the bank for a number of years.

According to the Companys CFO, the Company uses the accrual method of accounting for tax purposes. The Company is a service business and does not maintain any inventories and uncollectible accounts historically have not been significant. To the extent permitted under the tax law, the Company uses accelerated methods of depreciation but the Company is not an equipment intensive operation.

You presented this opportunity to your fellow partners in the Firms most recent partner meeting and the decision was unanimous that the Firm should move forward with documenting under the Firms client acceptance process formal acceptance of Kilo Corporation as a Firm client. This is a big win for you and you are delighted that the Firm has agreed to allow you to accept the Company as an audit client of the Firm.

As you are leaving the partner meeting, the Firms Quality Assurance Partner asked if you have considered whether or not the Tax Basis of accounting would meet the Preconditions for an Audit in accordance with paragraph .06 of AU-C Section 210. You are a little taken back by the partners comment but indicate that you will look at the issue and get back with her.

Required

By reference to AU-C Section 210, paragraphs .06, A2-A8 and AU-C Section 800, including paragraph 800.07, prepare a brief response to the Quality Assurance Partners comment.