Question
You are an audit senior at Morton and Lowe Chartered Accountants LLP. The firm has recently begun to perform audits and has two partners, managers,
You are an audit senior at Morton and Lowe Chartered Accountants LLP. The firm has recently begun to perform audits and has two partners, managers, senior and junior staff accountants respectively. Your firm has recently been approached by Don Cherry, the owner of Maple Leaf Construction, to be engaged in their upcoming audit. The company's bank requires them to submit annual audited financial statements 60 days after year end. In addition to submitting the statements to the bank, the company is bound by specific covenants. If in violation of these covenants the bank will require full payment of the outstanding loan.
The owner tells you that he had never liked his previous auditor Dafnas and Arthurs LLP. Don tells you "they would ignore my instructions on how to complete the audit and would threaten to qualify my report if I did not make adjustments to my year end work in process." He advises you not to contact them due to this poor relationship.
Maple Leaf Construction has projects all over the country and has recently been in the news for building new developments in marshy areas, and not building their homes up to code.
The company's controller Phil Kessel is a recent graduate fromNipissingUniversityand has no previous accounting experience. He was hired four months ago after the old controller Dion Phaneuf was caught for defrauding the company for over $80,000 of cash and assets.
Excerpts from financial statements are as follows:
20122011
Cash(106,584)76,854
Accounts receivable 1,025,896 658,000
Work in process 0 1056000
Capital assets 750000 750000
Accounts payable 987000 648000
Bank Loan 950000 1000000
Billings in excel 0 650000
Sales 3000000 2000000
Cost of Sales 720000 1300000
You have been asked by the engagement partner to analyse whether or not to accept the client.
What are three things to consider (not including engagement risks or preliminary analytical review) when accepting Maple Leaf Construction as a new client?
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