Whittington & Pany page 204

Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently
appointed to the board of directors of a local civic organization. The chairman of the board of the civic
organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra
Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit and
he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation
needed the audit to obtain a substantial amount of additional financing to acquire another company.
Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the
engagement should be substantial.

Since Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that
Tower & Tower wanted to do the work. Potter then mentioned that Tower & Tower’s quality control
policies require an investigation of new clients and approval by the managing partner, Lee Tower. Potter
obtained the authorization of Edmond to make the necessary inquiries for the new client investigation.
Edmond was found to be a highly respected member of the community. Also, Tierra Corporation was
highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation
reflected nothing negative.

As a final part of the investigation process, Potter contacted Edmond’s former tax accountant, Bill
Turner. Potter was surprised to discover that Turner did not share the others’ high opinion of Edmond.
Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of a large
capital loss reported on the sale of a tract of land to a trust. Edmond told the IRS agent that he had lost
all the supporting documentation for the transaction, and that he had no way of finding out the names of
the principals of the trust. A search by an IRS auditor revealed that the land was recorded in the name of
Edmond’s married daughter and that Edmond himself was listed as the trustee. The IRS disallowed the
loss and Edmond was assessed a civil fraud penalty. Potter was concerned about these findings, but
eventually concluded that Edmond had probably matured to a point where he would not engage in such
activities.
I. Identification of Issues

As a peer reviewer of the CPA firm of Tower & Tower, it is my duty to review the firm

properly so that they will be able to enhance the quality of their accounting and auditing
services.

In the case give, a lot of issues has been touched. Firstly, the management of the Tower
& Tower firm should be careful in assessing whether a new audit client should be approved
because it might affect the credibility of the firm itself that will lead to more struggles. Next,
it has been mentioned that the audit fee for the engagement should be substantial. Usually,
a significant amount of fee would definitely persuade the auditor to take the offer so the
auditor should really consider and weigh things before taking such offer. Moreover, A fraud
was committed 10 years ago and it is expected from every auditor to be in line with the code
of ethics so he should really be cautious in accepting clients for him to maintain a good morale.
A good and righteous CPA firm performance is not only good for their clients’ entities but also
very helpful to the public and the government. CPAs should avoid clients who can damage
their professional reputation. CPAs should seek clients who will enhance, not detract from
their professional reputation (Deppe, 1992).

II. Connections to Theoretical and Empirical Research

New client acceptance decisions are critical for auditors. Audit quality can negatively be
affected by limited knowledge of the new client's operations and finances. In the case
presented it has been mentioned that Potter did an investigation however we are still unsure
if the conclusion he reached is fair enough to accept the new client. The importance of risk
assessment has never been clearer with the business press declaring that the accounting
profession is in crisis in the wake of Arthur Anderson/ Enron debacle (Byrnes et al, 2002). In
fact, CPA firms are using the client-acceptance process as the first stage in controlling their
risk (MacDonald, 1997).

What is emerging in the literature is an understanding that CPAs must reject some clients
(Kerr et al, 2007). Rejecting some clients is not a big deal for some CPAs specially that they
really consider that ethical ways of accepting. However, in the indicated statement in the case
that audit fee for the engagement should be substantial, some CPAs would definitely consider
in accepting the client not because of the entity’s rectitude but because of the offer they have
 made. The AICPA (1999) has further endorsed this position by requiring the auditor to
consider the prospective client's ability to pay a reasonable fee for the services required.
Through this we need to consider the offered payment as well but in a reasonable amount
not substantial.

The International Standards of Auditing require that an auditor exercise professional

judgement and maintain Professional Skepticism all throughout the planning and
performance of the audit (IAASB, 2014: para 7). Professional Skepticism is necessary to the
critical assessment of audit evidence, which includes questioning of contradictory audit
evidence and the reliability of documents and responses to inquiries and other information
obtained from management and those charged with governance. Professional Skepticism
contributes to audit quality (IAASB, 2012).

An auditor independence enhances the auditor's ability to act with integrity, be objective
and maintain an attitude of Professional Skepticism. Auditor independence is the cornerstone
of the audit profession (Falk et al. , 1999; Mautz and Sharaf, 1961) and it underlies the work
and legitimacy of today's public accountants (Arens et al. , 2002; Levitt, 2000; Sikka and
Wilmott, 1995). There is general agreement that without independence, audit would simply
be meaningless (Power, 1999). Therefore, auditor independence is a fundamental antecedent
to Professional Skepticism (Chiang, 2016).

III. Analysis and Evaluation

1. CPA firm of Tower & Tower should accept the new client engagement provided that the
auditor should conduct the engagement with a mindset that recognizes the possibility
that a material misstatement due to fraud could be present, regardless of any past
experience with the entity and regardless of the auditor's belief about management's
honesty and integrity. Lee Tower can accept the engagement because of the evidence
that Edmond is highly respected in their community and that their banker and attorney
has high regard for him and the Dun & Bradstreet report on the corporation reflected
nothing negative.
2. CPA firm of Tower & Tower should not accept the new client engagement because of
the fraud committed 10 years ago. It happened years ago but it must still be taken into
consideration specially that the engagement is substantial. The thought of Edmond’s
maturity cannot just be a basis of the present happenings. A point that needs to be well-
 thought-out is the fact that Edmond did not disclose that incident to the upcoming auditor
and Turner did not share the others’ high opinion of Edmond. Additionally, the Tower &
Tower CPA firm should not accept the engagement because Tammy Potter was recently
appointed as a board of director of a local civic organization in which Lewis Edmond serves
as the chairman. This might result to intimidation threat between Edmond and Potter
specially that Edmond has a higher position compared to Potter.

As the peer reviewer of the firm, it would be best to decline the audit engagement
because of the following reasons stated on the paragraph above.

IV. Alternative Courses of Actions

ACCEPTING THE ENGAGEMENT DECLINING THE ENGAGEMENT

Obtain the understanding for the preconditions No further action since the audit engagement
required under PSA 210. will not be performed.
Since the client is somehow risky, it’s best to
design and plan the audit program well for
them keep up the audit quality.
As much as possible, maintain the
independence during the audit procedure.
Keep on possessing the professional skepticism
all throughout the audit engagement.

V. Evaluation of Consequences

If the CPA firm chooses to accept the audit engagement despite the underlying fact that
the client is too risky and possible threats can occur, it might lead to unethical ways of
practicing the profession. The following are some of the consequences that might arise:

1. Personal Consequences:
If caught, unethical practices related to the profession are punished. Depending
on the specific circumstances of the case, this can result in prison time, financial costs
and other legal punishments to the accountants found guilty. This wouldn’t just affect
the accountant, this is also devastating to its family, relatives and friends.
 2. Business Reputation:
A firm’s reputation and trustworthiness of its customers and business partners
will be damaged if poor ethics has been proven. The absence of trust guarantees that
the business will find it difficult to conduct business with others.

If the CPA firm chooses not to accept the audit engagement, the following are some
of the results that might happen:

1. Prevention in keeping self-reputation:

Declining a risky client would definitely assure the reputation of the accountant
to be maintained and his license as an accountant will be kept allowing him to continue
the profession.
2. Continuing CPA Firm:
Since the firm retained their control high despite the substantial client and a
significant payment offer, they’ll be able to avoid the scandalous events and struggles
that might happen in accepting the engagement.
VI. References
Chiang, C. (2016). Conceptualising the linkage between professional scepticism and auditor
independence. Pacific Accounting Review, 28(2), 180-200. Retrieved from
https://search.proquest.com/docview/1875490402?accountid=31259
Financial Statement Audit. Retrieved from https://pcaobus.org/Standards/Auditing/Pages/A
S2401.aspx
Kerr, S. G., Jooste, S., Grupe, F. H., & Vreeland, J. M. (2007). A CASE-BASED APPROACH TO THE
EVALUATION OF NEW AUDIT CLIENTS. The Journal of Computer Information Systems,
47(4), 19-27. Retrieved from https://search.proquest.com/docview/2325751
08?accountid=31259
Li, Alan. (n.d.). The Effects of Poor Ethics in Accounting. Small Business - Chron.com. Retrieved
from http://smallbusiness.chron.com/effects-poor-ethics-accounting-37750.html
Liu, L., Xie, X., Chang, Y., & Forgione, D. A. (2017). New clients, audit quality, and audit partner
industry expertise: Evidence from taiwan. International Journal of Auditing, 21(3), 288-
303. doi:http://dx.doi.org/10.1111/ijau.12095
 Case Study for the CPA Firm of Tower &Tower

Fourth Exam Competency-Based in

AUDTG411 (05206) Assurance Principles Prof Ethics & Good Governance
First Term Second Semester S.Y. 2018-2019
1:30 – 2:30

Submitted to:
Prof. Mark Glenn G. Parpan

Submitted by:
Aprile H. Anonuevo

21 January 2019