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ACCT 550-Case 5-4 Audit Client Considerations Lanny Beaudean

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ACCT 550-Case 5-4 Audit Client Considerations Lanny Beaudean

Case 5-4 Audit Client ConsiderationsLanny Beaudean joined the CPA firm of Cardinal & Coyote LLP in 2008 afterworking for two years for the IRS in Phoenix, Arizona. The firm is a secondtier CPA firm just below the Big Four in size. Beaudean had passed all fourparts of the CPA Exam in Arizona and decided to work for a locally basedCPA firm with international clients to gain a broad base of experience thatmight help him become a CFO at a public company in the future. Beaudeanhas been advancing rapidly and just became a senior at Cardinal & Coyote.Yancy Corliss is a new audit partner at Cardinal & Coyote. One day Corlisswas summoned to the office of Sharon Rules, the managing partner of thefirm. Rules told Corliss that she had been approached by a new client, JostFurniture International. Jost is a large southwestern chain of home furniturerental catering to young upscale individuals who might live in a city for twoyears or so and then move on. It recently opened an office in Canada andplans to expand to Europe in the not-too-distant future. Top management atJost seemed to imply that the firm would get the audit as long as itsubmitted a reasonable bid.Rules asked Corliss to do background checks on Jost and make whateverinquiries were necessary to assess the potential business risk of Jost as afuture client. Corliss was given three days to do the work and report back toRules with a recommendation. If the decision is to go ahead, then Cardinal& Coyote would submit a bid and compete with one other CPA firm for theaccount. The firm believes it will be a lucrative account, especially since thecompany has been in an expansion mode and will require advice onacquisitions and other advisory services in the future.Corliss assembled his team to review the background and other informationabout Jost Furniture. Corliss asked Beaudean to head up the assessmentand report back to Corliss in two days. During that time, Beaudean wouldhave two other staff members to help with the assignment. Beaudean wasexcited about his first opportunity to work on new client assessment.Beaudean met with Vinnie Gabelli, a transplanted Brooklyn native who hadgraduated from Arizona State University (ASU) at Phoenix. Gabelli was likea fish out of water in Arizona even though he had spent 16 months in themaster’s of accounting program at ASU. Gabelli thought a prickly pear wassomeone who could not make it in Staten Island and moved to Brooklyn fora better life.Gabelli told Beaudean that he welcomed the opportunity to work with anative of Phoenix and learn about its colorful history. Beaudean also askedJackie Oloff, a native of Minneapolis, to join the team. Jackie had moved toPhoenix two years ago with her husband, who is a professor of accountingat ASU. The team discussed mutual responsibilities, data sources for theinformation, key areas of risk, and then they broke up to start their work. Atthe end of the day, the team reassembled to share information. Here is abrief list of the findings:1. The predecessor firm had helped Jost Furniture with its initialpublic offering and audited the financial statements of the company forfive years. The firm resigned the account in 2007, following the issuanceof a modified opinion on the 2006 financial statements. The firm hadissued an unqualified opinion with an explanatory paragraph that raisedquestions about the ability of Jost to continue as a going concern becauseof persistent operating losses that threatened the company’s ability tosecure needed financing.2. A second firm audited the financial statements for 2007. That firmalso raised going-concern questions and was dismissed by Jost’s topmanagement.3. Jost’s financial statements for 2008 and 2009 were audited by athird firm that was dismissed after two years.4. The financial statements for 2010 had not been audited and onMarch 19, 2011, the CEO of Jost Furniture, Jerry Jost, approached SharonRules at a community event and asked her to submit a bid for the Jostaudit. Jost asked that the bid be submitted by March 23.5. A memorandum to the file prepared by Rules indicated that Jost hadadmitted to Rules that the company had past problems with variousauditors, but Jost assured Rules the going-concern issues had beenresolved. He also told Rules that the company’s controller had recentlyquit, the third time in four years there had been a turnover at thatposition. Jost told Rules the company had two candidates and he wantedher to help with the final decision since the CPA firm would work closelywith the controller.6. Beaudean, with the help of Gabelli and Oloff, reviewed the financialstatements of Jost Furniture for the past four years during which timegoing-concern explanatory paragraphs had been issued. They wentthrough a checklist of risk assessment issues for new clients and stoppedwhen they came to the following: Verify the circumstances of any priorauditor dismissal or withdrawal by first asking the client for permission toapproach the predecessor auditor(s). All three auditors felt this should bedone by Yancy Corliss.At the meeting at the end of the first day, the auditors discussed the unusualnumber of auditor changes in a short period of time apparently due togoing-concern issues that were raised in the audit reports for the years2006 through 2009. Beaudean asked Gabelli to contact the two banks wherethe company does business and check into its payment record. Oloff had apast business relationship with Miles Frazer, the attorney for Jost Furniture.Oloff agreed to contact Frazer to determine whether there are anyoutstanding litigation issues or other legal matters that the firm shouldknow about. They all agreed to get these matters done by the end of thesecond day and a meeting was set for 5:00 p.m.Gabelli found out that a $1 million loan payable to Phoenix Second NationalBank had been overdue before payment had been made March 15, 2011.The president of the bank told Gabelli that Jost had been in violation of adebt covenant agreement that obligated Jost to maintain a current ratio of1.5:1 at all times and that the bank was concerned about Jost’s ability tocontinue as a going concern, pointing out that Jost had gone below the ratiotwice. The first time Jost had violated the covenant, the bank accepted theexplanation of a temporary cash flow problem. The bank granted thecompany a three-month extension to meet the requirements of the debtcovenant. The bank subsequently found out the cash flow problem had beendue to the fact Jerry Jost withdrew $500,000 from the Jost cash account atSecond National Bank to help put a down payment on a mortgage loan tobuy an upscale house in Scottsdale. The second time it occurred, the bankbegan foreclosure on the loan on January 31, 2011, but by the time theprocess had been completed, Jost had paid off the entire $1 million balance.Oloff had no luck with the Frazer, the attorney for Jost. When she called hisoffices, the secretary always told Oloff that Frazer was on another line andshe’d take a message. When Oloff asked to leave a voice-mail message, shewas told Frazer did not have voice mail. How about leaving an e-mailmessage? she asked. No e-mail either. Can I text him, tweet him, or just doit the old-fashioned way and set up an appointment? No, no, no were theanswers. Oloff had left five messages for Frazer in the time before themeeting. She had nothing to report except to make an editorial commentabout lawyer responsiveness, or lack thereof.At first, Jost had side-stepped Corliss’s request for permission to speak withthe predecessor auditor. Jost claimed that there had been a “personalityconflict” and Jost was afraid the auditor would speak negatively about thecompany. Jost did agree after Corliss reminded him it was a required part ofthe procedures auditors follow in making the client acceptance decision.At 5:00 p.m. on March 22, the auditors met in the firm’s conference room todiscuss their findings. After hearing about Gabelli’s concerns and Oloff’slack of success with Frazer, Beaudean expressed serious concerns abouttaking on Jost as a client.Complete Case 5-4: Audit-Client Considerations, page 247.Read the above case. Choose one of the individuals in the case and identify theiractions and viewpoints. Write up an executive summary on the case, including answersto the following questions.1.Brief review of the case from your auditor’s point of view (one paragraph)2.Identification of the key behaviors, attitudes, and ethical dilemmas faced by orcaused by the auditor3.Assessment of the philosophical and practical approaches to ethical decisionmaking that could have avoided the problems in the case4.5.Evaluation of alternatives to solve the situation in the caseSummary of actions that you might have taken yourself if you had been in thissituation in real life



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