audcase2

Johanna M. Dagoy AUD411 Summer 2014 2:00-5:00

Principles of Auditing 12th edition Whittington & Pany page 204 Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit, and he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation needed the audit to obtain a substantial amount of additional financing to acquire another company. Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the engagement should be substantial. Since Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that Tower & Tower wanted to do the work. Potter then mentions that Tower & Tower’s quality control policies require an investigation of new clients and approval by the managing partner, Lee Tower. Potter obtained the authorization of Edmond to make the necessary inquiries for the new client investigation. Edmond was found to be a highly respected member of the community. Also, Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative. As a final part of the investigation process, Potter contacted Edmond’s former tax accountant, Bill Turner. Potter was surprised to discover that Turner did not share the other’s high opinion of Edmond. Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of a large capital loss reported on the sale of a tract of land to a trust. Edmond told the IRS agent that he had lost all of the supporting documentation for the transaction, and that he had no way of finding out the names of the principals of the trust. A search by an IRS auditor revealed that the land was recorded in the name of Edmond’s married daughter and that Edmond himself was listed as the trustee. The IRS disallowed the loss and Edmond was assessed a civil fraud penalty. Potter was concerned about these findings, but eventually concluded that Edmond had probably matured to a point where he would not engage in such activities.

CASE ANALYSIS STATEMENT OF THE PROBLEM Should Lee Tower accept the new client engagement? AREAS OF CONSIDERATION  

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Potter obtained the authorization of Edmond to make the necessary inquiries for the new client investigation. Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Edmond was found to be a highly respected member of the community Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative. Bill Turner, former tax accountant, did not share the other’s high opinion of Edmond. Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of a large capital loss reported on the sale of a tract of land to a trust. Edmond told the IRS agent that he had lost all of the supporting documentation for the transaction, and that he had no way of finding out the names of the principals of the trust. A search by an IRS auditor revealed that the land was recorded in the name of Edmond’s married daughter and that Edmond himself was listed as the trustee. The IRS disallowed the loss and Edmond was assessed a civil fraud penalty.

ANALYSIS/ AREAS OF CONSIDERATION 

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Lee Tower would accept the new client engagement. Provided, that Potter would investigate more on the fraud. Lee Tower may accept the engagement because of the evidence that Edmond is highly respected in their community and that their banker and attorney has high regard for him. If Lee tower would accept the engagement then they would have a great income since Tierra Corporation is growing. Lee could base his acceptance of the clients based on the good reputation of Edmond. Since Edmond is cooperative and is willing to be investigated, it would show that he has nothing to keep and that he was doing what is right. Lee Tower would not accept the new client engagement. Lee Tower would not accept the new client engagement because of the committed fraud 10 years ago. It might have happened years ago but the fraud committed must still be taken into consideration since the engagement is a substantial one. Edmond’s maturity cannot be proven by someone based on how he acts on the outside because the way he committed the fraud was intentional and it was obvious that he knows what really happened but he hide it from the authority. He even dared to say that he had lost all details of the sale of the land.

Lee Tower would not accept the engagement because Tammy Potter was recently appointed to the board of directors of a local civic organization and that the chairman of that organization is Lewis Edmond, who is also the owner of the prospective client, the Tierra Corporation. This might result to intimidation threat from Edmond to Potter since Edmond has a higher rank than Potter. This would also create self-interest threat that is so significant that no safeguards could reduce the threats to an acceptable level. The best thing to do is not to accept the engagement. RECOMMENDATION Lee Tower must not accept or approve the new client engagement because Tammy Potter is appointed to the board of directors of a local civic organization and that the chairman of that organization is Lewis Edmond, who is also the owner of the prospective client, the Tierra Corporation. The threats created because of this, were so significant that no safeguards could reduce the threats to an acceptable level but to not accept or approve the engagement. If Lee Tower would accept the engagement, it would only create a risk in the firm’s name. It is also not an assurance that even if Edmond had a good reputation in his communities and in bank and its attorney that he would not create a fraud. Knowing that he has a high position in the board, he could easily change or alter the details of the audit. He also has the power to intimidate the auditors because of his position. It would be best if Lee Tower would not accept the engagement.