Scenario for Part C Smuckers & Nudge, CPAs, have previously been engaged by Gerr

Question

Scenario for Part C Smuckers & Nudge, CPAs, have previously been engaged by Gerrimander Corporation to perform compilations and tax returns. Harry Gerrimander, the company’s president, indicated to the accountants that he needed “something more” than they previously provided. Mr. Gerrimander told Jenny Holt, the partner in-charge of the engagement, that the resulting nancial statements from this proposed engagement would be used primarily for management’s purposes internally as well as short-term bank loans. Holt recommended that a review of the nancial statements be performed and work be commenced without an engagement letter. As Holt proceeded with the work, she indicated uneasiness about certain gures and conclusions but said she would take the client’s word about the validity of some entries since the review was primarily for internal use and was not an audit. If Holt had not relied on the representations of management, she would have detected a material act of fraud committed by management. (a) Explain the role that an engagement letter could have played in this scenario and indicate what should have been covered in the letter. (b) What was Holt’s duty in this review? What is the potential liability faced by Smuckers & Nudge, CPAs? Who may assert claims against the rm?

Explanation / Answer

Ans a. Enagagement letter is a contract between the auditor to the Management(board of directors) that states to conduct auditing of financial statement in a true and fair view in conformity with applicable accounting principles signed by them.The letter covers scopeof the work,service to be rendered and the audit fee.

From the above scenario Miss holt was told to conduct a reviw of financial statements for internal use and not for an audit. Miss holt had indicated certain misleading figures in her conclusion of the financial statements. If there was an engagement letter involved, Miss holt would have highlighted the risk of material misstatement arising due to fraud or error as engagement letter the form of any report issued under the engagement.The letter would eliminate the misunderstanding and confusion about the type of financial statement to be examined, the estimated report date and the type of opinion expected between her and the client. In Addition to it, any legal problem relating to auditors failure to perform certain procedure can be reviewed with respect to contractual commitment.

Ans b. Holts duty in this review was to check the financial statements of the company for internal use and not for auditing.therefore when she found some misleading figures she preferred to take the validity of the client.

Potential liabilities faced by smucker and nudge,CPAs in case of financial statement reviews:

Ficititious sales,improper expense recognition,incorrect asset valuation,or unsuitable disclosures.

Here , the shareholders,lenders and investors can assert claims against the firm. They are the ones who are affected the most in case of frauds or error in financial statements as their money is invested in the company.

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