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136643567 Case 3 Essay

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AUDIT RISK AND ANALYTICAL PROCEDURES
Case 3
On June 28, 2006, Richard­­ Abernethy, managing partner of Abernethy and Chapman, met with the firm’s three-member engagement review committee to discuss the Lakeside Company audit. Although Abernethy admitted that the job had some problems, he strongly recommended seeking Lakeside as an audit client. He described Lakeside as an established Richomd company with an almost unlimited growth potential through the distributorship side of its business. Furthermore, he believed that the engagement offered an excellent opportunity for Abernethy and Chapman to gain entry into a new audit area: consumer electronics.

Abernethy indicated that he had talked with King and Company, the predecessor auditors. Abernethy not only described the controversy that had arisen over the auditor’s 2005 qualified opinion but also indicated that King and Company appeared to have no reservations about the integrity of Lakeside’s management. In addition, if retained, Abernethy and Chapman would be allowed to review the prior years’ audit documentation. Wallace Andrews, an audit manager with Abernethy and Chapman, then described to the committee his visit to the Lakeside Company headquarters. He had found many elements of the company’s accounting system to be more appropriate to a smaller business but still judged that the financial records were capable of being audited.

After reviewing all of the pertinent information, the review committee unanimously recommended that the firm accept this engagement. Consequently, Abernethy met with Benjamin Rogers, president of Lakeside, during the subsequent week and a final oral agreement was reached. Several days later, Abernethy forwaded two copies of an engagement letter (see Exhibit 3-1) to Rogers, who signed one copy and returned it to the CPA firm. Rogers also contacted the previous auditors, King and Company, and gave them formal permission to show the Lakeside audit documentation to Abernethy and Chapman.

Three members of the organization were assigned to the engagement team: Dan Cline, partner; Wallace Andrews, manager; and Carole Mitchell, senior auditor. In addition, several staff auditors were available to assist this group whenever necessary. There was also a consulting partner assigned. Although each of these auditors was involved in completing other engagements, a number of preliminar...

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