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Factors Favoring Acceptance

1. Responses to inquiries of
predecessor auditor were
complimentary about
Oceanviews employees
integrity, competence, and
dedication to running a
successful business.

Concerns about Acceptance

1. No information is provided
about the familiarity with
Oceanview and therefore this is
a concern in regards to accepting
the audit. Ensuring that the
auditors have no relationship
with someone who can influence
business decisions through their
ability to access financial and
non-financial information or
association with Oceanviews
business contracts.

2. Predecessor auditor
mentioned Oceanview was easy
to deal with. The company is
locally based and received
honest communication and
experiences with clients and
third parties. Indication that
Oceanview has little previous
conflict and in these terms likely
to be a fairly simple audit.

2. There is also a concern that

auditors do not have specialized
knowledge in the industry
therefore audit may require more
time, not only that auditors may
have insufficient resources to
gather all information needed eg
staff and therefore more difficult
to complete the audit, which
they may not want to undertake.

3. If there is certainty that

auditors are completely
independent from Oceanview
then accepting the audit means
that they can provide reasonable
assurance that the audit
represents a true and fair view of
the business reports provided by
management and able to provide
unbiased opinion for users.

3. It was noted that they

previously underpaid tax,
possibility that they were
involved in illegal acts in regards
to this. This raises suspicion that
there may have been illegal acts
in the preparation of the financial
statements to cause the
underpaid tax, as the
shareholder was previously an
auditor himself so he would have
the ability to manipulate the
financial statements.

Indicate whether you agree with the decision to accept the client.
Justify your decision, indicating the one or two factors from your
response to the first question that had the greatest influence on
your decision.
We do not agree with the decision to accept the client due to several
factors. Firstly we are concerned about the threat of familiarity, as
Oceanview is local to the auditing company which may led to the
the possibility that some of our staff may have a close relationship
with Oceanview making it difficult to ensure that we are completely
independent. Secondly, from the facts we assume that the auditing
company may have insufficient resources such as staff and specified
knowledge in the industry to complete the audit.
The client and our firm have agreed on an initial estimated audit fee
of $29,000. However, the estimated total cost of performing this
years audit is $37,590. Discuss possible reasons why a CPA firm
might charge a new client an audit fee that is lower than the
estimated first-year costs of performing the audit.

Gain client by setting an unrealistically low audit fee. This is

called low-balling.
Directors and management placed pressure on auditors to
influence auditors appointment. Auditor accepts audit so they
do not lose the audit to another firm.
Could indicate some sort of relationship with the client!
May be part of the negotiation?
Intimidation from client, being pressured to reduce the extent
of work required in order to reduce fees.

Auditors agree to significantly less than normal in order to obtain

the client. Since the auditors can earn quasi-rents (economic rents)
from maintaining existing clients due to high initial start-up costs fro
audits of new clients and due to significant transaction cost incurred
by the client when a change in auditor occurs.
Auditing standards require auditors who are considering accepting
an audit engagement to communicate with the previous auditors.

a. What is the primary purpose of this communication between

the new (successor) and old (predecessor) auditors?
The primary purpose of the communication is the gathering of
certain information that ultimately will help with the decision
whether to accept the client and also to aid the successor auditor in
undertaking the audit. Certain information could possibly be
retained such as the business history, previous experiences with the
client, reasons that the predecessor auditor no longer deals with the
client and also previous documents may be useful.

b. Why is the clients permission required before this

communication can take place?
The predecessor auditor requires the clients permission before
communicating with the successor and providing any information to
them, as it is the confidentiality requirement in the code of
Professional Conduct. However, the client does not need to give
permission and also the predecessor is not bound to provide
information about the client to the successor on request.
c. The successor auditor also often reviews the predecessor
auditors workpapers. What is the primary purpose of
reviewing these work papers?
Auditing Standards require the auditor to review the financial
reporting framework to determine whether management used it
appropriately in the preparation of their reports. The review of the
predecessor auditors work papers enables the successor auditor to
determine the financial statement framework used by the client. It
also may provide them with crucial information such as the nature
of the entity, the purpose and nature of the financial statement, and
whether by law they are prescribed particular framework. This
information gathered is important to the successor auditor to gather
suitable criteria for auditing the report.