Materiality Uncertainty Exists

When the impact of going concern problem is significant

such that, in the auditor's judgment, clear disclosures of the
nature and implications of uncertainties are necessary for the
fair presentation of the financial statements.
 Auditors evaluate
materiality of an item

Determining its materiality level or amount of misstatement/

omission that could be material to the financial statements taken as a
whole.
Materiality is set too high if its misstatement could significantly
influence the economic decision of users taken on the basis of financial
statements. This will guide the judgment of the auditor when first
detecting and evaluating the risk of material misstatement.
 Auditors evaluate
materiality of an item

Materiality of uncertainty can be determined by having a proper

basis of comparison, which in this case is the net income (write-off
effect) or another consideration is which of the statements are affected
(Balance sheet and income statement) looking at the case and judging it
based on comparison of potential loss to total assets, investment in
stores and owner's equity, it is assumed that there's a reasonable basis
of materiality
 Do you believe that the investment in the sixth store
was actually material to the Lakeside Company?

Possible closing of the 6th store due to continuous

financial losses plus the potential loss of 186,000 against client's
net worth of 500,000 would certainly appear to be material.
Other comparisons based on total assets or net income would
yield to same result.
 Why uncertainty disclosure is still considered necessary by the
auditing profession?
Should this requirement be dropped or changed?

Auditors are most likely to require adjustments under conditions of highest

uncertainty, that is, when fair values are both more subjectively-determined and more
imprecise in outcomes; however this tendency disappears when clients supplement
recognized fair values with additional disclosure. My finding suggests that the SEC’s
preference for supplemental disclosure has the unintended consequence of impacting
fair values recognized in the body of the financial statements. Finally, although
imprecision sometimes makes it more likely that auditors will require an adjustment, the
dollar amount of adjustment is smaller
 If Rogers had not consented in having Abernethy talk
with the predecessor auditor
what actions would have been open to Abernethy?

The action that would have been open to Abernethy is that there
will be a further investigation if he cannot get a info to the predecessor
auditor also there are alternative ways like checking the regulatory
bodies or SEC so that Abernethy can conclude what he will do.
 I f A b e r n e t h y h a d l e a r n e d f r o m K i n g t h a t Ro g e r s o r h i s s t a f f l a c ke d i n t e g r i t y,
what action should have then been followed and why?

If Abernathy discovered that Rogers and/or his staff lacked integrity through its predecessor auditing
firm, before rejecting or disassociating to client, there shall be proofs or evidences to support the claim or
perform an investigation considering the following to test the integrity of client:

A. Identify and business reputation of the client's principal owners, key management, related parties and
those charged with its governance.

A. The nature of the client's operations, including its business practices.

B. Information concerning the attitude of the client's principal owners, key management and those charged
with its governance towards such matters as aggressive interpretation of accounting standards and the
internal control environment.
D. Whether the client is aggressively concerned with maintaining the firm's fees as low as possible

E. Indications of an inappropriate limitation in the scope of work

F. Indications that the client might be involved in money laundering or other criminal activities.

D. The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.

Perform additional investigation to ensure the integrity of client through inquiry of other firm personnel
or third parties such as bankers, legal counsel and industry peers or do background searches of relevant
databases.

This discovery though doesn't give rise to an impulsive or reckless rejection, the firm should also
consider the quality/ internal control of the client and its course of action.
 Peer Review

Helps to monitor a CPA firm’s accounting and auditing practice (practice

monitoring). The goal of the practice monitoring, and the program itself, is to
promote and enhance quality in the accounting and auditing services provided by
the CPA firms subject to these standards. This goal serves the public interest and
enhances the significance of AICPA membership and accounting and audit quality.
 Two Types Of Peer Reviews

1) System Reviews - focus on a firm’s system of quality control

2) Engagement Reviews - focus on work performed on particular selected engagements.

While a System Review is a type of peer review that is a study and appraisal
by an independent evaluator(s), known as a peer reviewer, of a CPA firm’s system of quality
control to perform accounting and auditing work. The system represents the policies and
procedures that the CPA firm has designed, and is expected to follow, when performing its
work. The peer reviewer’s objective is to determine whether the system is designed to
ensure conformity with professional standards and whether the firm is complying with its
system appropriately.
 To plan a System Review

Peer reviewer obtains an understanding of the ff.

1. The firm’s accounting and auditing practice, such as the industries of its clients
2. The design of the firm’s system, including its policies and procedures and how the firm
checks itself that it is complying with them.

The reviewer assesses the risk levels implicit within different aspects of the
firm’s practice and its system. The reviewer obtains this understanding through inquiry
of firm personnel and review of documentation on the system, such as firm manuals.
 What does the peer review team examine?

The reviewer examines engagement working paper files and reports,

interviews selected firm personnel, reviews representations from the
firm, and examines selected administrative and personnel files. The
objectives of obtaining an understanding of the system and then testing
the system forms the basis for the reviewer’s conclusions in the peer
review report.
 Audit Working Papers
Used to document the information gathered during an audit. These working papers provide
evidence that sufficient information was obtained by an auditor to support his or her opinion
regarding the underlying financial statement through the following functions:

Are necessary for audit quality control purposes

Provide assurance that the work delegated by the audit partner has been properly completed
Provide evidence that an effective audit has been carried out
Increase the economy, efficiency, and effectiveness of the audit
Contain sufficiently detailed and
Up-to-date facts which justify the reasonableness of the auditor’s conclusions
Retain a record of matters of continuing significance to future audits.
 Pe r m a n e n t F i l e
Set of records that serves as an ongoing reference for an organization's
external auditors. The information in the file is intended to be accessed repeatedly in
successive audits to assist the audit team in the conduct of their tasks. The file may
contain the following documents:

Accounting policies
Articles of incorporation
Bylaws
Chart of accounts
Director list
History of the client organization
Internal controls documentation
Organization chart
Prior year's audit report
 Annual Working Paper Files
Typically each audit working paper must be headed with the following information:

1. The name of the client

2. The period covered by the audit
3. The subject matter
4. The file reference (3)
5. The initials (signature) of the member of staff who prepared the working paper, and the date on
which it was prepared
6. In the case of audit papers prepared by client staff, the date the working papers were received,
and the initials of the audit team member who carried out the audit work
7. The initials of the member of staff who reviewed the working papers and the date on which the
review was carried out
 A I C P A defines the accounting profession’s public as consisting of

clients, credit grantors, governments, employers, investors, the business and

financial community, and others who rely on the objectivity and integrity of CPAs

to maintain the orderly function of commerce. Every action taken by the CPA

should work towards serving the public interest.

 W h a t o b l i g a t i o n d o e s a C PA f i r m t o e n s u r e t h a t a
client understands the audit function?

The commitment to serve the public interest in accounting has eroded, as

personal and business relationships with clients and client management
increasingly create conflicts of interest. Many such relationships have created
barriers to objective and impartial decision making and threatened the
independence of the audit function. The 2014 recodification of the AICPA Code of
Professional Conduct attempts to deal with a conflict of interests when providing
attest services through a threats-and-safeguards approach
 D i f f e r e n c e B e t w e e n A Re v i e w A n d A n A u d i t

Review Engagement
The auditor conducts analytical procedures and makes inquiries to ascertain whether the
information contained within the financial statements is correct. The result is a limited level of
assurance that the financial statements being presented do not require any material modifications.
Audit Engagement
The auditor must corroborate the ending balances in the client's accounts and disclosures.
This calls for the examination of source documents, third party confirmations, physical inspections,
tests of internal control, and other procedures as needed.
 D i f f e r e n c e B e t w e e n A Re v i e w A n d A n A u d i t
Level of assurance. The level of assurance that the financial statements of a client are fairly
presented is at its highest for an audit and at its lowest (none at all) for a compilation, with a review
somewhere in between.

Reliance on management. In all three cases, the auditor begins with the account balances provided
by management, but an audit requires in a significant amount of corroboration of this information. A
review requires some testing of the information, while a compilation almost entirely relies on the
presented information.

Understanding of internal control. The auditor only tests the internal controls of the client in an
audit; no testing is conducted for a review or a compilation

Work performed. An audit requires a significant number of hours to complete, since there are many
audit procedures to be performed. A review requires substantially fewer hours, while the effort
associated with a compilation is relatively minor.

Price. It requires vastly more effort for an auditor to complete an audit, so audits are much more
expensive than a review, which in turn is more expensive tan a compilation.
 Richard Abernethy has to make a recommendation to the partner review
committee as to whether the firm should seek the audit engagement of
t h e l a ke s i d e c o m p a n y. I f y o u w e r e A b e r n e t h y, w h a t w o u l d y o u
recommend?

I would recommend audit engagement; an audit

engagement very loosely refers to an audit that an auditor performs.
More specifically, it refers only to the initial stage of an audit during
which the auditor notifies the client he has accepted the audit work
and clarifies his understanding of the audit's purpose and scope.