Assignment 1 - Discussion Questions yes i did it PDF

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Peter Naber Peter Naber

Jacob Nichols Jacob Nichols

Assignment ONE Discussion Questions

LILTS BERGER & ASSOCIATES

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Certified Public Accountants

CW 11/23/ 2018 PN & JN 2/19/2019

Ocean City, Florida 33140

October 30, 2018

Mr. Donald Phillips, President 36 Clearwater Lake Road Ocean City, Florida 33140 Dear Mr. Phillips: You have requested that we audit the financial statements of Oceanview Marine Company, which comprise the balance sheet for December 31, 2018, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. We are pleased to confirm our acceptance and understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements.

We will perform our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risk of material misstatement of the financial statements. An audit also includes evaluating

the

appropriateness

of

accounting

policies

used

and

the

reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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CW 11/23/ 2018 PN & JN 2/19/20 Because of the inherent limitations of and audit, together with the inherent limitations of internal control, an unavoidable risk that some material misstatements may not be detected exists, even though the audit is properly planned and performed in accordance with GAAS. In making our risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in writing concerning and significant deficiencies or material weaknesses in internal control relevant to the audit of the financial statements that we have identified during the audit.

Our audit will be conducted on the basis that the management of Oceanview Marine Company acknowledges and understands that it has responsibility for a. the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; b. the design, implementation and maintenance of internal control relevant to the fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. c. to provide us with access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation, and other matters; additional information that we may request from management for the purpose of the audit; and unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence. As part of our audit process, we will request from management written confirmation concerning representations made to use in connection with the audit. We will issue a written report upon completion of our audit of Oceanview Marine Company’s financial statements. Our report will be addressed to the board of directors of Oceanview Marine Company. We cannot provide assurance than an unmodified opinion will be expressed. Circumstances may arise in which it is

4-3 necessary for us to modify our opinion, add an emphasis-of-matter or other-matter paragraph, or withdraw from the engagement. The timing of our services is scheduled for performance and completion as follows: Begin interim fieldwork Completion of fieldwork Delivery of management letter Delivery of audit report Delivery of tax returns

CW 11/23/2 018 PN & JN 2/19/2019

December 1, 2018 March 15, 2019 March 22, 2019 March 29, 2019 March 29, 2019

Our fees will be based on our standard hourly rates. Invoices will be submitted periodically as the work progresses and are payable upon presentation. Should we find any conditions that could significantly affect our initial estimated total fees of $32,000, we will notify you immediately.

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities.

Yours very truly,

Charles Ward Charles Ward, CPA Partner

Per:

Donald

Phillips Donald Phillips, President Oceanview Marine Company

November 10, 2018

NAME: Peter Naber/ Jacob Nichols

Discussion questions 1 . Cha r l e sWar d,t hee nga ge me ntpa r t ne r ,hasal r e a dyc ompl e t e dt heCl i e ntAc c e pt anc e For mi nt hepe r ma ne ntfil e .Bas e dont hei nf or ma t i onyous t udi e di nt hePe r ma ne ntFi l e a ndt heuna udi t e dfinanc i als t a t e me nt si nc l ude di nt hec ur r e ntwor kpape r s( wor kpa pe r s 1 1t hr ough1 5 ) ,e val ua t et hec l i e nta c c e pt anc ede c i s i on.Or ga ni z eyourans we rus i ng t het woc ol umnf or ma ts hownbe l ow. a .I ndi c a t et wof a vor a bl ef ac t or smos ti mpor t antt ot hec l i e nta c c e pt anc ede c i s i on ( onef ac t orha sbe e npr ovi de da sa ne x a mpl e ) . b .I ndi c a t et hr e ec onc e r nsyouha vea bouta c c e pt i ngOc e anvi e wa sac l i e nt .

1.

2.

3.

Factors Favoring Acceptance Responses to inquiries of predecessor auditor were complimentary about Oceanview. Predecessor auditor spoke highly of Oceanview’s employees’ integrity, competence, and dedication to running a successful business.

Oceanview Marine has been very proactive and cooperative during the information gathering process. When Oceanview Marine officially appointed Lilts Berger & Associates as their auditors, they gave the firm permission to request any information they needed from prior auditors. As a result, their prior auditors were able and willing to provide the firm access to prior years’ workpapers, which have helped the firm gain a better understanding of the company and their financial information. The documents and financial statements provided show that Oceanview Marine is a healthy company. After examining these documents and using them to calculate several financial ratios, Charles Ward concluded that accepting Oceanview Marine as a client would be a good idea Oceanview Marine’s reason for switching auditors appears to be reasonable and did not seem to occur for any odd or suspicious reasons. According to the company, the main reason they are switching is because they want to work with an auditing firm in Ocean City since they believe it will be cheaper and more accessible. The previous auditors were also not surprised by the change in auditors. The event that caused

Concerns about Acceptance 1 Within the next two to three years, the . company is considering going public. Since going public could cause dramatic changes to occur within the company in terms of their structure and additional regulations and rules they would be subject to, the auditors would have to account for that when they decide to go public. Additionally, the auditing of a private company is different from auditing a public company. If Oceanview Marine went public, the auditors would have to start from scratch since they would not have previous information about the company as a public company. 2 The auditors may not be familiar with the . marine or boating industry that Oceanview Marine is in. As a result, the audit could take significantly longer, it could require more resources than they may have, and it may make cause them to make more mistakes during the auditing process

3 There is no information provided regarding . the independence or level of familiarity between Oceanview Marine and the prior auditors. This would be important for the new auditors to consider since the previous auditors could have developed a friendly and close relationship with Oceanview while

auditing the, which could have impacted the review they gave of the company to the new auditors. If the previous auditors had an interest in or a close relationship with Oceanview, they may try to portray the company and their financial information in the best possible light. So, since not enough is known about the relationship between the prior auditors and Oceanview, the new auditors should be cautious about the information they receive about Oceanview from the prior auditors until they can determine if they were independent. 2 .I ndi c a t ewhe t he ryoua gr e ewi t ht hede c i s i ont oa c c e ptt hec l i e nt .J us t i f yyourde c i s i on, i ndi c a t i ngt heoneort wof a c t or sf r om yourr e s pons et ot hefir s tque s t i ont ha tha dt he gr e a t e s ti nflue nc eonyourde c i s i on.

them to hire their previous auditors in the first place also seems to demonstrate that they are a responsible client. This is because when Oceanview discovered that they underpaid their taxes in 2008, they immediately hired a CPA firm to help them prepare their taxes to avoid those mistakes in the future.

I agree with the decision to accept Oceanview Marine as a client for a couple reasons. One of the main reasons that I think Oceanview Marine would be a good client is because they have been very transparent and cooperative during the initial dealings. The history of the audit shows the willingness of Oceanview Marine to work with their new potential auditing partner because they gave the new auditors permission to request any information or documents they needed from the previous auditors. They also provided their previous auditors with the payments necessary to ensure that the new auditors could review the information. The cooperation shown on the part of Oceanview Marine is important in this decision because it shows that they are not trying to hide any information from the auditors and they are open to working with them throughout the auditing process, which will be very beneficial for the auditors. Their openness and willingness to cooperate also signifies that they are most likely a lower risk company that will be better for the firm to audit. Another factor that has convinced me that Oceanview Marine would be a good client is that the previous auditors spoke well of the company. Gathering information about a potential client is an important step in determining whether a client should be accepted or avoided. In this case, the previous auditors praised the business and its employees in regards to their dedication, integrity, and competence, which signifies that the company probably has an effective management structure in place. Other inquiries that were made to suppliers, bankers, and attorneys of the company also appeared to result in a more positive view of the company.

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3 . Thec l i e nta ndourfir m ha vea gr e e dona ni ni t i ale s t i ma t e da udi tf e eof$ 32 , 0 00( s e et he e nga ge me ntl e t t e r ) .Howe ve r ,t hee s t i ma t e dt ot a lc os tofpe r f or mi ngt hi sye ar ’ saudi ti s $ 3 7 , 59 0( s e et hef e ebudge tonwor kpa pe r6 5 ) .Di s c us spos s i bl er e a s onswhyaCP A fir m mi ghtc har geane wc l i e nta naudi tf e et ha ti sl o we rt ha nt hee s t i ma t e dfir s t ye a rc os t sof pe r f or mi ngt hea udi t . One reason that a CPA firm may go with a lower price is due to an independence issue. Auditing firms must be both independent in fact and independent in appearance. Being independent in fact means a firm will not act without integrity or objectivity. They will try to be honest and not subvert the public good for any sort of personal gain. Being

NAME: Peter Naber/ Jacob Nichols

independent in appearance means avoiding any possible conflicts of interest that are observable. While in this case with Oceanview it may be not likely that there is a breach of independence, but it should be considered for one reason. The switch from auditors was prompted by a desire for Oceanview to switch to a local and more accessible firm. This reason was not necessarily nefarious but depending on the size of Oceanview compared to the size of the auditors’ company, Oceanview may provide them with a significant source of their revenue. Therefore, the auditors might feel the need to be nicer with Oceanview, regarding the price. Another reason could arise from the auditors’ experience in the industry. For example, the auditors could be very experienced with auditing the boat industry, which would potentially help lower the risks of any audits they partake in from the industry. This could even be expanded on if the industry is heavily regulated, and the experienced auditors feels as though their knowledge of the industry and regulations allows them to be more efficient than other auditors. However, there are two issues with this reason. The first is as a small auditing firm, it is unlikely that the auditors would have a specialization in the boating industry. Second, the boating industry might not be a heavily regulated one, so specialization in it may not produce such a large edge in efficiency, especially over larger auditing firms. Furthermore, it should also be noted that this would impact pricing outside of the first year, as well. The other reason could revolve around the negotiation process. First, it is important to note what the engagement partner found. The engagement partner spoke to the CPA firm that worked prior with Oceanview. These CPAs had very positive remarks about Oceanview’s work processes and employees. They also spoke highly of the integrity of the company. Because of this, the new auditing firm may feel that the risk levels are going to be low, at least from a preliminary standpoint, so they would feel that a lower price would suffice. Also, during the negotiation process, there may have been other companies bidding for the audit, so this auditing firm may have decided to go at a lower price that they were comfortable with. Lastly, since this is a first year project with new clients, the auditing firm may have decided to lower the price as they were comfortable with to start work on a positive note with the new clients.

4 . Audi t i ng s t a nda r ds r e qui r ea udi t or s who a r ec ons i de r i ng a c c e pt i ng a n audi t e nga ge me ntt oc ommuni c a t ewi t ht hepr e vi ousa udi t or s . a. What is the primary purpose of this communication between the new (successor) and old (predecessor) auditors? The purpose of the communication is so the predecessor auditor can speak to the successor about any potential issues, such as disagreements over accounting issues, audit fees and procedures, and the integrity of management. Disagreements over accounting issues could be a sign of managerial mismanagement, which could mean that controls within the company are weak. Any sort of disagreement with audit fees

and audit procedures would obviously also show a bad side of the client that could mean the auditor should not even approach them. Integrity of management is an important indicator of how skeptical the auditors may have to be, if they decide to take the audit. The successor auditors also look for communications to those who deal with the company’s compliance with laws and regulations from the predecessor auditors. This can matter particularly in certain industries that are highly regulated and can add a significant amount of risk to the audit. Furthermore, the communications that the predecessor had with management can also be important, as they can also be indicators of poor control just like any actions or information that weakens the integrity of management. Lastly, if the predecessor had any understanding of why they were let off the job, it can influence the levels of risk, particularly if the company is going from a well-known auditor to a lesser known one. b .Whyi st hec l i e nt ’ spe r mi s s i on r e qui r e d be f or et hi sc ommuni c a t i on c ant a ke pl ac e ? AU-C 210 Terms of Engagement and AS 2610 Initial Audits -- Communications Between Predecessor and Successor Auditors require client permission for these communications. From a client perspective, it would make sense that they need to be asked to have financial information about them released, even if they intended to give it up anyway. c . Thes uc c e s s oraudi t ora l s oof t e nr e vi e wst hepr e de c e s s ora udi t or ’ swor kpa pe r s . Wha ti st hepr i mar ypur pos eofr e vi e wi ngt he s ewor kpa pe r s ? The primary purpose of any communication between the successor and predecessor auditor is for the successor to get information they need that could tell them about the company and its management. When the successor audit company reviews the predecessor’s workpapers, they get new insight into how to work with the client. This can be especially useful since the successor company will have to start up the working relationship between them and their new client. Therefore, they can see some of the work practices that may occur with the client, and how the auditor looked at them. Furthermore, it should be noted that the review is only a review, because these workpapers are the property of the predecessor auditors and should not be copied.

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