Audit Process

Audit Process

AUDIT PROCESS 5

AuditProcess

Case8-38

  1. Compliance with the auditing standards in the acceptance of the new client

Auditfirms are required by the quality control standards to maintainspecific client acceptance procedures. Henson, Davis and company hadsuch policy though it was not enforced in the process of acceptingMcMullan’s Resources. Auditing standards are contained in thestatement of the American Institute of Certified Public Accountants(AICPA). It incorporates the quality control standards that monitorsan audit practice. Henson Davis and Company failed to comply with theauditing standards by accepting McMullan’s Resources as a newclient without completing the normal procedure.

Qualitycontrol standards also emphasize on the need for communicationbetween the predecessor auditor and the successor auditor. Beale hadtried to start the communication, but she left it incomplete when theprior auditor responsible in McMullan’s Resources failed to returnher call. In compliance with the Auditing Standards, Beale could havetaken an initiative of seeking all means and try to communicate withthe outgoing auditor. Communicating with the prior auditor mayprovide conflicting information to the succeeding auditor (Alvin etal., 2010). This could have confronted the relationship with the newclient and maybe this was the reason communication was neglected.Beale went ahead and accepted representations from Ted knowing thatit was inappropriate as provided by the auditing standards. Generallyaccepted Auditing Standards requires that auditors should notconsider representations from the management instead of directcommunication with the predecessor auditor.

Therefore,Henson Davis &amp Company could not have accepted the engagementwith McMullan’s Resources until a sufficient direct communicationwith Gardner-Smith has occurred.

HensonDavis &amp Company also broke the professional ethics by acceptingnot to reveal non-compliance of the new client with the accountingprinciples. The firm agreed for the elimination of the disclosure ofthe gain from the McMullan’s debt forgiven by the bank. Hensonaccepted the idea of McMullan of treating the gain as non-taxable soas minimize the contingent tax liability. It is against theaccounting principles since such gains are taxable (Alvin et al.,2010).

b)McMullan’s Montreal contract audit work

Theaudit work of McMullan’s Montreal contract had not been donesufficiently. This was because there were some omissions in the actagreement. Accepted auditing standards requires a firm to include acancelation clause in the contract. However, this clause that couldmitigate enforceability was missing in the Montreal contract. Ifsufficient audit work had been done, this question could have beenraised. Revenue recognition for the contract was also not complyingwith the quality control standards.

c)Auditing standards

Blackhad tried all his best to conduct himself in accordance with theaudit standards. However, the blame for all the non-compliance shouldbe placed on Beale. Black had confidence on Sarah Beale, but she wentahead and accepted the new client without complying with the firm’snew client acceptance procedures. Beale also failed to comply withthe auditing standards which requires the succeeding auditor tocommunicate directly with the predeceasing auditor (Alvin et al.,2010). Black came to realize the problems later, but this was becausehe relied on the confidence and trust that he had put on the managerBeale. Therefore, we can conclude that Beale did not conduct herselfin accordance with the audit standards, but Black was trying to actin compliance with the audit standards though it was too late.

Reference

AlvinA., Elder J. and Beasley S. (2010). Auditing and Assurance Services14thEdition. Upper Saddle River: