Mary’s Requests To Have Cathy Issue A Less Than Complete Audit Presented Some Problems. Case Study Sample

In this case analysis there are a variety of ways that Cathy should have taken the engagement and made her recommendation. The specific nature of these choices will be elucidated within the context of her reasonable alternatives. Further, it is significant to understand whether the decisions were made in material error or as a key factor towards the case and scope limitations. Despite the decision making process, a type of reservation would be needed based on material error. The possibility of issuing reports rather than auditing will be clarified as well in order to understand omissions regarding each mistake. There are consequent results that change the impact that audits have in terms of opinions and risk. In discussing this case it is evident that there are a variety of prospects and applications towards the decision making and audit process. These terms will be elucidated in the broader context of the appeals and individual character’s choices.
Business owners and partners are aware certified public accountants perform audit services and write audit reports on any company's financial statements. Some businessmen might not know there are alternatives to the audit process. CPAs provide two other levels of service for unaudited financial statements. These types are compilation and review statements. The purpose of these statements is to provide credibility to and strengthen the credibility of the client's financial statements. Often, regulatory agencies and banks that offer loans will require some confirmed written statement be issued.
It was mistake on Mary’s part to offer the audit job to Cathy. Notwithstanding the family relationship, there have to be controls at any company that should eliminate the danger of this accounting firm to perform an improper audit.  Standard certified audit requires the hiring of an independent accounting firm. Although an argument can be made that Cathy’s new firm qualifies under this requirement, the fact that she is a family member could create problems.
Mary does not share all of the blame for this error. Cathy should have known better after all it was no mystery that she had just recently graduated as a Certified Public Accountant. Cathy should have realized that her recent graduation did not even come close to qualifying her to complete the audit.
The certified audit provides the highest degree of credibility for the client's financial condition, as some important audit procedures are not required for compilation statements or review statements. Some of the audit procedures not required are an evaluation and testing of the internal controls of the client company, including their documentation controls, inventory assessment and account balances.
Cathy should have known that most small businesses have a very close relationship with their auditors. Much of that relationship is based on experience and trust that can only be built over years of direct experience for both parties. Just because Cathy received what she thought was complete cooperation from the former auditor of Smith Tools does not mean that she received all of the data necessary for her to take over. There might have been other anomalies that Cathy needed to be aware of about the company before she could tackle such a huge task.
In the future Mary needs to be more sensitive to the needs of her employer before making such a large decision. It sounded as if Mary had sole authority to make the decision regarding auditors. This is probably not a good idea for the company. A small, closely held company needs close monitoring of its accountant relationships. A minimum of two company members should be involved in any decision of that magnitude.
Mary’s assertion that the $40,000 error in their audit procedures is not material to the audit is completely wrong. This company has an outstanding working capital loan with a bank. Although the amount of the loan is not mentioned, I can guaranty that their bank required audited financial statements in order to make the loan. I can also assure you that their bank requires updated Certified Audits each and every year that the loan is outstanding. By changing accountants to perform the audit the company creates concern in the eyes of their lender. The bank officer handling this relationship will probably want to have a discussion with the company to explain the purpose in this change. After all the annual audit of a company can affect so many aspects that the decision to change accountants should be made carefully.

If their banker is presented with an audit in question, or a qualified audit, it may have a material impact on the company’s relationship with their lender.
Basically the company that needs to issue an audited financial essentially wants to be able to provide an unqualified clean opinion. This indicates to whomever is reviewing that audit that the numbers the issuing company provides can be counted on as completely accurate.
A qualified opinion indicates to the recipient that there might be some errors in the numbers and that such an opinion cannot be relied upon to have provided the most accurate corporate financial information.
Cathy tried to explain all this to Mary but Mary was not receptive and insisted on completion within the time frame provided. If Mary were to comply she would have had to issue a qualified statement.
First and foremost it is important to recognize that having Mary as the sole decision maker in regard to choosing a new accountant is clearly a strategic error.
On top of that error, having Mary choose a brand new accountant literally just having earned her degree is also a large blunder. It must be clear to the reader that a brand new accounting firm could not possibly have the experience required to conduct a professional audit.
Mary should have realized that Cathy would require extra time to do the job due to her lack of experience. Forcing Cathy to do the work in a limited amount of time was just another error made by these parties.
Cathy herself should have never taken the assignment. She leaned on her family relationship with Mary and did not use realistic analysis of the situation. Cathy believed that her brief encounters with the prior accounting firm were enough of a knowledge base to enable her to do a proper job.
Finally the other owners of this company should have never permitted a change in accounting firms without a proper investigation into how this new arrangement might harm their relationship with their commercial lender. In conclusion there are a variety of changes that could have determined the way that this situation transpired. From an organizational standpoint the analysis provided indicates changes to the overall context of auditing and interrelated constructs. By carefully examining each decision and the subsequent effects within the structure of the organization it is possible to identify themes in research and investigate potential future changes that can be made to improve the quality of information and resource allocation. These themes are pertinent to all areas of accounting and are clarified through auditing and other modalities of business management.