You are a senior staff accountant at a CPA firm. Your firm just receives a call from Windy Solar Company. Windy Solar borrows money from banks and is required to submit audited financial statements to the banks. Windy Solar calls your firm because its current CPA firm has recently withdrawn from the audit engagement and the reasons for the withdrawal are not provided.

Your firm's partner John Smith has summoned you to conduct some research before he interviews Windy Solar.

Based on your research for this case, please provide the following:

1. The circumstances under which an auditor withdraws from audit engagements.

2. Questions John Smith needs to ask when he interviews Windy Solar.

3.Communications between the predecessor and successor auditors.

4. The Audit Engagement Letter assuming your firm accepts the audit engagement. Please be sure to provide a full Audit Engagement Letter.

Checklist of the Case (100 Points)

The following list will be used to grade the write-up. Please use it as a guideline to complete your write-up.

1) Good introductory paragraph - 10 points

2) Reached a reasonable opinion about how to address the matter using the tax codes or court cases as guides. Explained thought process clearly.

Q1 - 15 points

Q2 - 15 points

Q3 - 15 points

Q4 - 25 point

3) Good closing paragraph for memo - 10 points

4) Good use of grammar, spelling, and format - 10 points

Sample Write-Up (See next page)

Instructor's Comments -

Below is a part of a good tax research paper. The issues are listed and the Recommendations are clearly explained and supported by the audit standards. References are provided so that the readers will have access to the original sources. The write-up in this paper is rather lengthy. You can use your own discretion to determine the appropriate length.

Memo

To : John Smith

From : A student

Re : Solutions to Preliminary Engagement with Windy Solar Company

Date : May 1, 2014

Issue 1

The circumstances under which an auditor withdraws from audit engagement.

Recommendations

Auditor can withdraw from an audit engagement if they are presented into a scope limitation and if management is unethical, fraudulent, deceptive or completely unwilling to make changes to their financials to clear up misstatements.

Difficulties encountered in performing the audit represent a scope limitation, which may result in auditor withdrawing from the engagement. Auditing Standard 4 Paragraph 41 and 46 mentions that if the scope of an engagement to report on whether a previously reported material weakness continues to exist, any limitations on the scope of the auditor's work require auditor to either disclaim an opinion or withdraw from the engagement. Related to this scope limitation is the Auditing Standard 5 paragraph 74, which allows an auditor to withdraw when there is a scope limitation on forming an opinion on the effectiveness of internal control over financial reporting. Auditing standard 16 paragraph 23 also says significant difficulties in communicating to the audit committee is included as scope limitation (significant delays by management, unreasonably brief time within which to complete the audit).

According to AU 316 Paragraph 78, if an auditor sees that there is considerately high risk of material misstatement and the result of audit test might show significant risk of material misstatement due to fraud, the auditor may consider withdrawing from the engagement.

Illegal act of client might also result in auditor's withdrawal. According to AU 317 paragraph 20, auditor may withdraw from an engagement where the client refuses to accept the auditor's report as modified for client's illegal acts. In this case, the auditor needs to indicate the reasons for withdrawal to audit committee or board of directors. Paragraph 22 even necessitates withdrawal when client does not take remedial actions that auditor consider necessary, even though this might not be material to the financial statements.

If the client will not agree to the revision of financial statements or will not accept the accountant's disclaimer of opinion with the description of departure from GAAP, the auditor may withdraw from the engagement based on AU 504 sec. 13

References:

http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_4.aspx

http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_5.aspx

http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_16.aspx

http://pcaobus.org/Standards/Auditing/Pages/AU316_68-78.aspx

http://pcaobus.org/Standards/Auditing/Pages/AU317.aspx

http://pcaobus.org/Standards/Auditing/Pages/AU504.aspx