Case Analysis

Case 1
Warren Aspen, a BSA student from a local university, helped support his education with
a part time job maintaining all accounting records for a small business, Label Company, located
near the campus. Upon graduation, Warren passed the CPA examination and joined the audit
staff of a local CPA firm. However, he continued to perform all accounting work for Label
Company during his “leisure time.” Two years later, Warren received his CPA certificate and
decided to give up his part-time work with Label Company. He notified Label that he would no
longer be available after preparing the year-end financial statements.

On January 9, Warren delivered the annual financial statements as his last act for Label
Company. The owner then made the following request: “Warren, I am applying for a substantial
bank loan, and the bank loan officer insists upon getting audited financial statements to support
my loan application. You are now a CPA, and you know everything that’s happened in this
company and everything that’s included in these financial statements, and you know they give
a fair picture. I would appreciate it if you would write out the standard audit report and attach
it to the financial statements. Then I’ll be able to get some fast action on my loan application.”

Required:
a. Would Warren be justified in complying with White’s request for an auditor’s opinion?
Explain. No. Simply the fact that, professionally, he is no longer a part of Label Co., and
that he is rendering service for a local accounting firm, the owner of Label Co. cannot
personally inquire of Warren’s auditing services.

b. If you think Warren should issue the audit report, do you think he should first perform an
audit of the company despite his detailed knowledge of the company’s affairs? Explain.

c. If Label had requested an audit by the national CPA firm for which Warren worked, would it
have been reasonable for that fi rm to accept and to assign Warren to perform the audit? Explain.
Yes (I believe so). While a personal request for an audit does not go through, if Label Co.
decides to inquire of Warren’s auditing services through his employer at the national CPA
firm, then it is completely justifiable for both the firm and Warren to accept the client.

Case 2
Cris Alexis, a partner in the CPA firm of Alexis and Alwyn, received the following
memorandum from Belly Gray, president of Gray Manufacturing Corporation, an audit client of
many years.

Dear Cris:
I have a new type of engagement for you. You are familiar with how much time and money
we have been spending in installing equipment to eliminate the air and water pollution caused by
our manufacturing plant. We have changed our production process to reduce discharge of gases;
we have changed to more expensive fuel sources with less pollution potential; and we have
discontinued some products because we couldn’t produce them without causing considerable
pollution.

I don’t think the stockholders and the public are aware of the efforts we have made, and I want to
inform them of our accomplishments in avoiding danger to the environment. We will devote a
major part of our annual report to this topic, stressing that our company is the leader of the entire
industry in combating pollution. To make this publicity more convincing, I would like to retain
your fi rm to study what we have done and to attest as independent accountants that our
operations are the best in the industry as far as preventing pollution is concerned.
To justify your statement, you are welcome to investigate every aspect of our operations as fully
as you wish. We will pay for your services at your regular audit rates and will publish your
“pollution opinion” in our annual report to stockholders immediately following some pictures
and discussion of our special equipment and processes for preventing industrial pollution. We
may put this section of the annual report in a separate cover and distribute it free to the public.
Please let me know at once if this engagement is acceptable to you.

Required:
Put yourself in Bart James’s position and write a reply to this client’s request. Indicate clearly
whether you are willing to accept the engagement and explain your attitude toward this proposed
extension of the auditor’s attest function.

Dear Gray,
I have thoroughly analyzed your proposition and have made a decision I deem to be most
appropriate.

The proposed engagement at hand, while nonetheless acceptable in some areas, remains
questionable. An operational audit for the extra lengths taken by your company’s
management for the proper control of pollution produced from its operations do not entail
any breach in provisions, nor does it elicit any ethical issues. Surely, with the cooperation of
the management, I would be able to give a credible opinion about these points. It is also of
good notice that you would be giving me the capability to fully investigate your operations;
it would make the credibility of my audit opinion even stronger.

However, in adherence to the provisions of my profession, I cannot accept this proposed

engagement due to the fact that it strives for an opinion that displays the company as “the
best in the industry”, whether it would be true or not. As an auditor, my job is to state
whether this company in question is acceptable to standard, or not. I do not include in my
reports a comparison between competitors; which one is better, and which one falls behind
the others.

Perhaps if we could settle into a much more agreeable engagement, and I would consider
your inquiry once more.

Regards,
Cris