Lakeside Case Study Unit 3 solution

Unit 3

D1

Auditing standards require that auditors must document their understanding of an

engagement in an engagement letter in the audit files, including the engagement’s

objectives, the responsibilities of the auditor and management, and the engagement’s

limitations. The engagement letter is an agreement between the CPA firm and the

client. It should specify what is being done audit, review etc. Also, if any restrictions

on auditor’s work, deadlines to complete the audit, assistance to be provided by the

client’s personnel and an agreement on fees. The engagement letter also serves the

purpose of informing the client that the auditor cannot guarantee that all acts of fraud

will be discovered. The audit committee is responsible for hiring the auditor for a

public company audit. This is required by Sarbanes-Oxley Act. Management usually

signs the engagement letter for private Company engagements. The engagement letter

does not affect the CPA firm’s responsibility to external users of audited F/S but it may

affect legal responsibility to client. Engagement letter info is important in planning the

audit principally because it affects the timing of the tests and the total amount of time

the audit and other services will take.

Specific responsibilities the CPA firm accepted are obtaining reasonable, rather than

absolute, assurance that the financial statements are free of material misstatement,

whether caused by error or fraud, ensuring that the audit committee is aware of any

reportable conditions that come to their attention, and preparing the federal and state
income tax returns for the Lakeside Company.

The responsibilities assigned for management are “The financial statements are the

responsibility of the company's management. Management is also responsible for (1)

establishing and maintaining effective internal control over financial reports, (2)

identifying and ensuring the company complies with the laws and regulations

applicable to its activities, (3) making all financial records and related information

available to us, and (4) providing to us at the conclusion of the engagement a

representation letter that, among other things, will confirm management's responsibility

for the preparation of the financial statements in conformity with generally accepted

accounting principles, the availability of financial records and related data, the

completeness and availability of all minutes of the board and committee meetings, and

to the best of its knowledge and belief, the absence of fraud involving management or

those employees who have a significant role in the entity's internal control.”

D5

According to AU-C Section 520, the expected effectiveness and efficiency of a

substantive analytical procedure in addressing risks of material misstatement depends

on, among other things, (a) the nature of the assertion, (b) the plausibility and

predictability of the relationship, (c) the availability and reliability of the data used to

develop the expectation, and (d) the precision of the expectation..

Substantive analytical procedures are generally more effective for large volumes

of transactions that tend to be predictable over time. The application of planned

analytical procedures is based on the expectation that relationships among data exist
and continue in the absence of known conditions to the contrary. Different types of

analytical procedures provide different levels of assurance.

So, how competent is evidence provided by analytical procedures compared with

other types of evidence may varies based on these factors mentioned above.