Dean Wareham, an audit manager, is preparing a proposal for a publicly held comp

Question

Dean Wareham, an audit manager, is preparing a proposal for a publicly held company in the manufacturing industry. The potential client is growing rapidly and introducing many new products yet still has a manual accounting system. The company also has never undertaken any tax planning activities and feels that it pays a higher percentage of its income in taxes than its competitors. Additionally, it is concerned that its monitoring activities are inadequate because it does not have an internal audit department. Dean knows that the SEC has rules regarding auditor independence. Required: 1. Prepare a summary of nonaudit services that Dean can include in his proposal that do not violate the SEC's independence rules 2. How would your answer to requirement 1 differ if the potential client were not publicly held? In other words, what additional nonaudit services could Dean include in his proposal? What conditions would have to be met in order for the firm to provide the additional services?

Explanation / Answer

The client clearly needs help with the following nonaudit services: 1.Developing an automated accounting system. 2.Providing tax-planningadvice. 3.Outsourcing the internal auditfunction. 4.Developing projections and/or forecastsfor the company’s new products. ii.What can Dean help them with? 1.Because the client is a public company audit client, the firm would be prohibited from helping the client design or implement a software system and from providing internal audit outsourcing. Provision of tax-planning advice is allowed by SEC independence rules. Assisting the client to develop projections and/or forecasts for the company’s new products and other nonaudit work would be subject to approval by the audit committee and would be strictly limited by the principles of not performing a management function, not auditing one’s own work, and not performing an advocacy role. iii.How would the answer change if the client was private? 1.Most of the above non-audit services would not be prohibited if the client were not publicly held, though there are restrictions to be observed. For example, see the discussion relating to the AICPA’s restrictions regarding financial information systems design and implementation for a non-public client. Also, auditors would have to make sure that they didn’t make managerial decisions or audit their own workwhen deciding the nature of the services that they could provide.

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