well DING ATTEST WORK SCENARIO 9 CASCADING AT Ja to do less, should you insist on doing more? If you are asked to do as as one of his clients EZ Duzit, a medium- ampany. (EZ Duzit in past years has paid a yearly audit fee Recently EZ Duzit has been struggling va The Situation Burt Lang is an audit par ined manufacturing compa in the neighborhood financially, to the point that results in his firm's givi come as a surprise to th Lang in the past have had The next year, Sweety Bill con much better for us and borhood of $150,000.) Recently EZ Duzit has be point that Lang insists upon, and goes through a process, that firm's giving the company a going-concern opinion. This does not rise to the owner of the company, Sweety Bill Leonard, since he and past have had extensive discussions about this possibility. wear, Sweety Bill comes to Lang and says, This past year has been for us, and he hands him the draft financial statements, which te a 20% increase in sales. The company is back in profitability. The line of reflected in the books has declined. Sweety Bill adds that he is pleased that e company has cut back on its expenses and has been more efficient in sales Getting that going-concern was a real wake up call and spurred our managers really to get going," he jokes, thanking Lang. "We've started to turn things around. Everything looks so much more positive. And because we're on a very tight cost control plan, we've solicited and received approval from the bank to seek this year only a review, not a full-fledged audit." Sweety Bill views this as contributing to the 'tighter ship' that his company has become, since a review will cost about $30,000, rather than the $150,000 fee of past audits. Lang congratulates him on doing such a good job. However, he is somewhat concerned, because it is not obvious to him that it is wise to substitute a review for an audit. Yet he can see why the newly cost-conscious company might favor it, and why the bank might regard a review as a justifiable, if temporary, expedient. en Lang's firm does the review, he notices that a few ratios seem not quite gross margin seems to be lower than the previous year, although not by not sure that that makes sense. Also, interest expense is higher-but to be explained by the fact that interest rates are slightly higher. But & concerns are no obstacle to his firm's completing the review. af passes. This time Sweety Bill approaches Lang and says. The right. The gross margin seen much. He's not sure that th perhaps that is to be explained by these niggling concerns Another year passes. turnaround is continuing. For on the 'tight ship policy at our compilation, which we figure w inquires as to the wisdom of this, mng. For one year more we want to forego an audit, as part of y at our company. This year, in fact, we are seeking only a e figure would cost only $10,000, not a review." When Lang om of this, Sweety Bill asserts that a review would only be so much unnecessary work. He explains that bank auditors ha look at inventory and receivables. They've already subjecte greater scrutiny than a review, he says, and the bank agrees the unnecessary to seek a review. "In these circumstances," Sweet Duzit's number one priority should be-and is--to pay down its debe of the conversation, almost as an afterthought, he adds that in the he may need some expert witness work done, which could result $100,000 in fees for Lang's firm. ors have already been in to the business to far es that it would be Sweety Bill says, "EZ its debt." At the end at in the coming months uld result in upwards of ce, that Sweety Bill has h colleges from a private sale. These incidental Question Lang is somewhat perplexed by this. He is aware, for instance, that Su left the country club. Sweety Bill also had his son switch colleges from school to a state school, and he put his summer home up for sale. These in facts might suggest that EZ Duzit has not yet reached profitability and perhar not turned around to the extent that Sweety Bill claims. But then Lang thinks the there could be some other, good explanation--perhaps, even, Sweety Bill accepted drastic pay reduction to help the company attain profitability. Furthermore, the bank apparently feels comfortable with skipping an audit for one more year. In this context, four courses of action present themselves to Lang. Which is excluded, and which is best for him to do? Looking for an Answer 1. Lang should tell Sweety Bill that he is not comfortable with doing anything other than a full audit. He should refuse to do only a compilation and withdraw from the engagement if Sweety Bill continues to insist on a compilation. 2. He should withdraw from the engagement entirely, but he should do so with a so-called "noisy withdrawal': that is, he should make it clear to Sweety Bill that major creditors will get copies of his firm's letter refusing to do the requested compilation 3. He should confer directly with the financial institutions, the creditors of EZ Duzit, and discuss the wisdom of not doing an audit for a second straight year. 4. He should go ahead with a compilation, on the grounds that it is the clients responsibility, and therefore in his domain, to determine what level of attest function he wishes to seek. His firm's responsibility, on the other hand, is to carry out, with professionalism and competence, the job that his client requests. (See page 183 below for a suggested resolution and discussion.) well DING ATTEST WORK SCENARIO 9 CASCADING AT Ja to do less, should you insist on doing more? If you are asked to do as as one of his clients EZ Duzit, a medium- ampany. (EZ Duzit in past years has paid a yearly audit fee Recently EZ Duzit has been struggling va The Situation Burt Lang is an audit par ined manufacturing compa in the neighborhood financially, to the point that results in his firm's givi come as a surprise to th Lang in the past have had The next year, Sweety Bill con much better for us and borhood of $150,000.) Recently EZ Duzit has be point that Lang insists upon, and goes through a process, that firm's giving the company a going-concern opinion. This does not rise to the owner of the company, Sweety Bill Leonard, since he and past have had extensive discussions about this possibility. wear, Sweety Bill comes to Lang and says, This past year has been for us, and he hands him the draft financial statements, which te a 20% increase in sales. The company is back in profitability. The line of reflected in the books has declined. Sweety Bill adds that he is pleased that e company has cut back on its expenses and has been more efficient in sales Getting that going-concern was a real wake up call and spurred our managers really to get going," he jokes, thanking Lang. "We've started to turn things around. Everything looks so much more positive. And because we're on a very tight cost control plan, we've solicited and received approval from the bank to seek this year only a review, not a full-fledged audit." Sweety Bill views this as contributing to the 'tighter ship' that his company has become, since a review will cost about $30,000, rather than the $150,000 fee of past audits. Lang congratulates him on doing such a good job. However, he is somewhat concerned, because it is not obvious to him that it is wise to substitute a review for an audit. Yet he can see why the newly cost-conscious company might favor it, and why the bank might regard a review as a justifiable, if temporary, expedient. en Lang's firm does the review, he notices that a few ratios seem not quite gross margin seems to be lower than the previous year, although not by not sure that that makes sense. Also, interest expense is higher-but to be explained by the fact that interest rates are slightly higher. But & concerns are no obstacle to his firm's completing the review. af passes. This time Sweety Bill approaches Lang and says. The right. The gross margin seen much. He's not sure that th perhaps that is to be explained by these niggling concerns Another year passes. turnaround is continuing. For on the 'tight ship policy at our compilation, which we figure w inquires as to the wisdom of this, mng. For one year more we want to forego an audit, as part of y at our company. This year, in fact, we are seeking only a e figure would cost only $10,000, not a review." When Lang om of this, Sweety Bill asserts that a review would only be so much unnecessary work. He explains that bank auditors ha look at inventory and receivables. They've already subjecte greater scrutiny than a review, he says, and the bank agrees the unnecessary to seek a review. "In these circumstances," Sweet Duzit's number one priority should be-and is--to pay down its debe of the conversation, almost as an afterthought, he adds that in the he may need some expert witness work done, which could result $100,000 in fees for Lang's firm. ors have already been in to the business to far es that it would be Sweety Bill says, "EZ its debt." At the end at in the coming months uld result in upwards of ce, that Sweety Bill has h colleges from a private sale. These incidental Question Lang is somewhat perplexed by this. He is aware, for instance, that Su left the country club. Sweety Bill also had his son switch colleges from school to a state school, and he put his summer home up for sale. These in facts might suggest that EZ Duzit has not yet reached profitability and perhar not turned around to the extent that Sweety Bill claims. But then Lang thinks the there could be some other, good explanation--perhaps, even, Sweety Bill accepted drastic pay reduction to help the company attain profitability. Furthermore, the bank apparently feels comfortable with skipping an audit for one more year. In this context, four courses of action present themselves to Lang. Which is excluded, and which is best for him to do? Looking for an Answer 1. Lang should tell Sweety Bill that he is not comfortable with doing anything other than a full audit. He should refuse to do only a compilation and withdraw from the engagement if Sweety Bill continues to insist on a compilation. 2. He should withdraw from the engagement entirely, but he should do so with a so-called "noisy withdrawal': that is, he should make it clear to Sweety Bill that major creditors will get copies of his firm's letter refusing to do the requested compilation 3. He should confer directly with the financial institutions, the creditors of EZ Duzit, and discuss the wisdom of not doing an audit for a second straight year. 4. He should go ahead with a compilation, on the grounds that it is the clients responsibility, and therefore in his domain, to determine what level of attest function he wishes to seek. His firm's responsibility, on the other hand, is to carry out, with professionalism and competence, the job that his client requests. (See page 183 below for a suggested resolution and discussion.)