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Ch.4 Short Essay Question: You are an audit manager for B3 LLP.

You are visiting one of your clients, RGS Ltd. to have preliminary discussions about the current years audit. When you arrive, the president of the company, A. Goodwin, asks to see you first. Normally you meet with the Controller first and the President joins you briefly. You have competition, announces the president, Why should I pay B3 twice as much for the same thing? He tosses a flyer to you which he says was handed to him. The flyer is from a new firm, Capirchio Mar LLP. It shows the address, phone number and e-mail for the firm. Where possible, they introduced themselves to the officers of companies they have visited. It was in this way that they met your client and quoted a fee of $15,000 for a complete audit. You know that you have not been contacted by anyone regarding your client. You also have notes from last years files which list several problems in last years audit, partly related to a poorly done conversion to a new accounting system and also related to the weak financial position of RGS. RGS is publicly listed and has significant bank debt. Their activities are primarily research based and there are no sources of revenue.

You need to respond immediately to the presidents question, but you also want to have a discussion with Lori and Alexander over lunch.

Solution: The issues raised in this case have to do with: 1. Professional Courtesy 2. Fee Quotation 3. Competency

Professional courtesy Public accountants should not approach another accountants clients and quote for assurance work. If the client approaches them and requests a quote, then they are permitted to respond, however, professional courtesy would suggest they should approach the incumbent auditor. There is also a concern that if they do not contact the current auditor, they will be unaware of any circumstances which may require extra work, and therefore, extra fees. By quoting a low-ball fee, they have created a problem between B3 and their client, RGS. Also, handing out flyers and visiting the offices of prospective clients contravenes the rules against soliciting. Fee quotation The fee quoted by Cpirchio Mar is significantly lower than B3s. It is rare that clients see things from the auditors perspective and it is unlikely that the president of RGS disclosed last years problems. It is possible that B3 has overcharged RGS, but it is more likely that Capirchio Mar have bid too low. When they realize their mistake, they may cut back on the amount of work they perform, or they may increase their bill after the fact to recover their extra costs. Competency Based on only three years experience, it is clear that Lori and Alexander are unlikely to be competent in

doing any but the most basic of assurance engagements. They are unlikely to be able to take on a medium sized or larger public client and complete the work in a timely manner. They may be able to hire outside expertise, such as may be required to split expenditures into research expenses and development costs. This may compensate for their lack of experience, but as the senior partners in the firm, they need to have more expertise themselves. It is unlikely that either one has run an audit from start to finish.