MGMT S-1620: AUDITING Case Assignment #1 CASE FACTS: The CPA firm of Abernethy a
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MGMT S-1620: AUDITING Case Assignment #1 CASE FACTS:
The CPA firm of Abernethy and Chapman is located in central Virginia. This partnership began operations in 1979 and now employs 145 accountants out of a main office in Richmond and three branches in nearby Virginia cities. The Richmond office has 87 professionals: 10 partners, 14 managers, 21 senior auditors and 42 staff auditors. Eleven members of this group concentrate in tax services while another seven offer a variety of consulting services to the firm’s clients. The others spend a majority of their time performing audits, other assurance services and accounting and bookkeeping services. During busy periods, individuals occasionally have to move from one area of the firm to another. Eighteen additional employees comprise the secretarial and clerical staff of the Richmond office. At present, all of the firm’s audit clients are nonpublic companies. However, the firm is considering adding some client that are publicly traded companies. In hiring professionals, the firm considers only college graduates with a major in accounting and requires that each employee sit for the CPA exam within one year of employment. Once employed, all accountants in the firm must complete at least 40 hours per year of continuing education. Promotions within the firm are guided by seniority and technical competence. For example, for a staff auditor to be promoted to senior auditor, he or she must have been with the firm at least two years, must have passed the CPA exam and must have demonstrated outstanding competence in job performance. DeAnna Malott, a partner in the Richmond office, monitors the quality control standards and the employee policies of the firm. Once of Ms. Malott’s responsibilities is to conduct training seminars for new professionals regarding the policies of the firm. Under these policies, employees must sever all financial ties to audit clients. Another of Ms. Malott’s duties is to assign personnel to the various audit engagements of the firm. In making these assignments, she considers the employee’s experience with the client’s business, as well as his or her technical training. For audit engagements, firm policy requires the assignment of a consulting partner, as well as a partner-in-charge of the engagement. The partner-in-charge of the audit heads the engagement team, while the consulting partner advises and reviews the final work of the team. The audit engagement team consists of a partner-in-charge, a manager, a senior auditor and one or more staff auditors. The partner-in-charge of the engagement has the definitive responsibility for decisions made during the audit, even though he or she does not normally carry out the major activities of the audit. The manager, senior auditor, and staff auditors perform the majority of the procedures required by an audit. The assignment of an engagement team, as well as a consulting partner, is to ensure not only that audits are appropriately supervised but also that complete objectivity and competence are used in conducting each audit. Abernethy and Chapman as a firm, and the Richmond office in particular has experienced considerable growth over the past five years. The partners believe that a good marketing strategy and a continuing emphasis on high-quality auditing and accounting services have generated the increase in revenues. During the most recent fiscal year, the Richmond office totaled over $3.5 million in gross revenues while earning nearly $1 million in net income. Profits accruing to individual partners ranged from $75,000 to $300,000. Traditionally, 60% of the firm’s income has been derived from audit engagements with tax services providing another 25% of the total. Remaining revenues are generated by attestation functions other than audits (e.g. reviews), accounting and bookkeeping services (e.g. compilations) and consulting services. The partners agree that assurance services, attestation services (including the audit function) and consulting services offer the greatest potential for expanding the firm’s income and have constantly stressed the growth of these services. Public company auditing is a prospective area for growth but it brings new risks. At present, Abernethy and Chapman has a number of large clients in the Richmond area: a small hotel chain, a group of furniture stores, several large car dealerships and three of the local banks. Recently, the firm decided to seek additional clients. Therefore, within the last 18 months, a series of advertisements has been published in local newspapers as well as in several prominent Virginia periodicals. In addition, a monthly newsletter describing current accounting and taxation changes is distributed to clients and local business leaders. This marketing strategy was created by a Richmond advertising agency and has stressed the theme “We Are Here to Help Your Business.” The entire campaign cost the firm approximately $100,000 and has just recently begun to generate additional revenues.
Required: Please review and evaluate the quality control standards for Abernethy and Chapman, described in the case narrative above, using the template provided below:
Standard
Existing Procedures
Recommendation
Additional Information needed
Independence, integrity, & objectivity
Personnel Management
Acceptance and continuation of clients
Engagement performance
Monitoring
Standard
Existing Procedures
Recommendation
Additional Information needed
Independence, integrity, & objectivity
Personnel Management
Acceptance and continuation of clients
Engagement performance
Monitoring
Explanation / Answer
Standard
Existing procedures
Recommendation
Additional information needed
Independence, integrity and objectivity
The current procedures in use in the organization allows the employees and accountants independence to do their work however, the duty to assign various personnel to audit assignments could be improved further.
Allowing the accountants and employees more freedom to come up with innovative ideas to improve the quality of services provided by the organization to its clients.
Additional information as to initiatives taken by the management to use different auditing and working techniques to improve independence and integrity of the work force.
Personnel management
The current personnel management is not very effective with only one person, i.e. DeAnna Mallot, in charge of quality control training seminar as well as with the responsibility of assigning personnel to different audit engagements.
The organization should have different person in charge of training seminars, preferably a professional rather than a partner of the firm and another individual in charge of assigning duties to the employees for audit and other purposes.
Information about the recruitment policy of the firm would have helped us to understand the personnel management of the firm better.
Acceptance and continuation of clients
The firm believes in quality of services and continuation with its clients by providing them top quality services is the prime objective of the firm.
Improving the quality of services further will help the firm to retain more of its clients in the future.
The detailed procedure followed by the firm to retain its clients would be helpful to make effective strategy in the future.
Engagement performance
The firm has always motivated its employees to provide top quality services to its clients. The engagement performance over the years have been good however, there is always scope to improve the same.
Providing training by experts on regular basis will help the employees to improve their professional skills and competencies would be beneficial for the firm and the engagement performances provided by it.
Detailed about how the engagement performance of the firm are appraised by the management of the firm would have been very helpful.
Monitoring
The current monitoring process is not very effective with relatively low emphasis on monitoring of work and performance of employees and accountants.
Special program shall be designed to effectively monitor the work and performance of each accountants and employees to ensure that the engagement performance is up-to the mark.
What specific steps the firm take to monitor the work and performance of its workers.
Standard
Existing procedures
Recommendation
Additional information needed
Independence, integrity and objectivity
The current procedures in use in the organization allows the employees and accountants independence to do their work however, the duty to assign various personnel to audit assignments could be improved further.
Allowing the accountants and employees more freedom to come up with innovative ideas to improve the quality of services provided by the organization to its clients.
Additional information as to initiatives taken by the management to use different auditing and working techniques to improve independence and integrity of the work force.
Personnel management
The current personnel management is not very effective with only one person, i.e. DeAnna Mallot, in charge of quality control training seminar as well as with the responsibility of assigning personnel to different audit engagements.
The organization should have different person in charge of training seminars, preferably a professional rather than a partner of the firm and another individual in charge of assigning duties to the employees for audit and other purposes.
Information about the recruitment policy of the firm would have helped us to understand the personnel management of the firm better.
Acceptance and continuation of clients
The firm believes in quality of services and continuation with its clients by providing them top quality services is the prime objective of the firm.
Improving the quality of services further will help the firm to retain more of its clients in the future.
The detailed procedure followed by the firm to retain its clients would be helpful to make effective strategy in the future.
Engagement performance
The firm has always motivated its employees to provide top quality services to its clients. The engagement performance over the years have been good however, there is always scope to improve the same.
Providing training by experts on regular basis will help the employees to improve their professional skills and competencies would be beneficial for the firm and the engagement performances provided by it.
Detailed about how the engagement performance of the firm are appraised by the management of the firm would have been very helpful.
Monitoring
The current monitoring process is not very effective with relatively low emphasis on monitoring of work and performance of employees and accountants.
Special program shall be designed to effectively monitor the work and performance of each accountants and employees to ensure that the engagement performance is up-to the mark.
What specific steps the firm take to monitor the work and performance of its workers.
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