CASE 1

AUDIT FEES

Case issue: "Second, Rogers believed that King and Company was charging an excessive fee for its annual
audit. He stated that he was bo longer willing to pay that much money for, what he termed were,
inferior sevices."

Discussion/Explanation: It seems like that Lakeside Company do not understand the purpose of an audit
or all of the work that the job entails. The company do not understand the basis for audit fees. Before
accepting the audit engagement with client, Abernethy and Chapman should clarified to client the
following matters regarding audit fees:

Section 240 of COE states that

"When entering into negotiations regarding professional services, a CPA may quote whatever fee
deemed to be appropriate. The fact that a CPA may quote a fee lower than another is not in itself
unethical.

"Fees charged for assurance engagements should be a fair reflection of the value of the work involved
and should take into account, among others:

1. The skill and knowledge required for the type of work involved

2. The level of training and experience of the persons necessarily engaged on the work

3. The time necessarily occupied by each person engaged on the work

4. The degree of responsibility and urgency that the work entails.

Abernethy and Chapman should consider ethical matters in setting audit fees to client. Nevertheless,
there may be threats to compliance with the fundamental principles arising from the level of fees quoted
and should be eliminate them or reduce them to an acceptable level. Section 240 of COE gives an
example:

" for example..........."

"The significance of such threats......"

Therefore, all audit fees are ethical provided that they are not contingent fees. Sec. 240 of COE defines
contingent fees as:

".............."

Safeguards related to Contingent fees provided by Sec 240 of COE are: (Page 182)

".........."
SEGREGATION OF DUTIES

Case Issue: "During busy periods, individuals occasionally have to move from one area of the firm to
another."

For example, the appearance of independence may be in question if a member of the consulting staff
helps to install a new accounting system for a client and then she moves to the audit staff to audit this
same client.

2Sec 290 of COE discussed about the independence:

".........."

"The conceptual framewrok approach shall be applied by......"

In this issue, there is a self-review threat, COE Sec (?) defines self-review threat as

"............"

Self review threat may impair objectivity and professional competence of the professional accountant.

Sec 120 of COE discussed objectivity:

"........."

Sec 130 of COE discussed professional competence and due care

"........."

To eliminate the threat or reduce it to an acceptably low level, the following safeguards are discussed by
Sec 200 of COE:

"........."

THREAT TO COMPETENCE

Case Issue: This case implies that no auditor with the firm of Abernethy and Chapman has an in-depth
understanding of the audio equipment business. Can a CPA firm allowed to accept an engagement
without having established the necessary expertise to oversee the audit?

PSQC 1, paragraph A18 discussed about firm capability, competence, time and resources.

"........."

So therefore, they should need experts in audio equipmement business in order to eliminate or minimize
the threat to professional competence and due care of the CPA firm.
CLIENT ACCEPTANCE

Sec 210-Professional Appointment of COE discussed that:

"..........."

Introducing a profit-sharing bonus plan motivates the employees and gives added incentive to
work harder to attain a certain goal of income figure. Such incentive should be a special concern
to an auditor because it also imposes risk that the employees will try to reach that goal in
unethical means like generating false figure for sales or deferring the recognition of expenses so
they can receive the cash bonus.

Therefore, before accepting an engagement with the client, a CPA firm should fully understand
the business and financial reporting practices of the client.