ACQUIRING GOOD ETHICAL JUDGMENT SCENARIO 9 CASCADING ATTEST WORK 167 are asked t

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ACQUIRING GOOD ETHICAL JUDGMENT SCENARIO 9 CASCADING ATTEST WORK 167 are asked to do less, should you insist on doing more? The Situation g is an audit partner who has as one of his clients EZ Duzit, a medium Burt Lan ized manufacturing company. (EZ Duzit in past years has paid a yearly audit fee in the neighborhood of S150,000.) Recently EZ Duzit has been struggling inancially, to the point that Lang insists upon, and goes through a process, that Its in his firm's giving the company a going-concern opinion. This does no me as a surprise to the owner of the company, Sweety Bill Leonard, since he and Lan g in the past have had extensive discussions about this possibility The next year, Sweety Bill comes to Lang and says, "This past year has been much better for us," and he hands him the draft financial statements, which indicate a 20% increase in sales. The company is back in profitability. The line of credit reflected in the books has declined. Sweety Bill adds that he is pleased that his company has cut back on its expenses and has been more efficient in sales "Getting that going-concern was a real wake up call and spurred our managers really to get 'going," he jokes, thanking Lang. "We've started to turn things around. Everything looks so much more positive. And because we're on a very tight cost control plan, we've solicited and received approval from the bank to seek this year only a review, not a full-fledged audit." Sweety Bill views this a contributing to the 'tighter ship' that his company has become, since a revi cost about $30,000, rather than the $150,000 fee of past audits Lang congratulates him on doing such a good job. However, he is somewhat concerned, because it is not obvious to him that it is wise to substitute a review for an audit. Yet he can see why the newly cost-conscious company might favor it When Lang's firm does the review, he notices that a few ratios seem not quite right. The gross margin seems to be lower than the previous year, although not by and why the bank might regard a review as a justifiable, if temporary, expedient. gher-but much. He's not sure that that makes sense. Also, interest expense is hi niggling concerns are no obstacle to his firm's completing the review Another year passes. This time Sweety Bill approaches Lang and says, "The perhaps that is to be explained by the fact that interest rates are slightly higher. But turnaround is continuing. For one year more we want to forego an audit, as part of e tight ship' policy at our company. This year, in fact, we are seeking only a ompilation, which we figure would cost only $10,000, not a review" When Lang inquires as to the wisdom of this, Sweety Bill asserts that a review would only be so com

Explanation / Answer

being an audit partner ,Langs' primary responsibility is to ensure the well being of the related parties ie. the creditors (in this case). minor dicrepensies in the books of accounts does not cause that much of trouble but selling personal belongings to "pay down its debt" can be considered as a serious case of misconduct which can be easily seen from the fact the in the books of the organisation it is not earning as much profit as claimed. public service and customer satisfaction should be the priority of the organisation and not debt reduction. cost reduction techniques adopted by the manufactuer can be considered a right step in favour of the creditors but downgrading from an audit to a review to a compilation can at the end of the day question the authenticty and credibility of the books of accounts.thus Lang should pursue step no 2 and disassociate himself from the engagement and inform the related party so that they can make an informed decision for themselves

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