After each review, the PC is expansible for making recommendations regarding whether the Discipline Committee should proceed to further investigations and/or a hearing which will determine whether members have in fact breached the rules. Furthermore, they are expected to provide recommendations to the individual or firm as to how they can ensure they do not breach the rules in the future. You thought this sounded like an interesting opportunity and you agreed to join the PC.
At the January 3, 2013 PC meeting, you were assigned to investigate two complaints made against Tim Taylor (Taylor), a partner at Holmes ALP. The PC Chairperson asked you to investigate the complaints and prepare a report to the PC regarding whether there is merit to the allegations. He asked that you make a conclusion about whether or not the complaints should be referred to the Discipline Committee for a hearing. The Chairperson provided you with information regarding Taylor (Exhibit 1) and details of the complaints (Exhibit 2).
Given your experience with a large public accounting firm and the notes he’s gathered from a previous investigator (Exhibit 3), he questions whether or not the working papers were conducted in accordance with CASE and would like to insider if this should be raised with the Canadian Public Accountability Board (CRAB). Before starting your investigation, you confirmed that there are no conflicts of interest as you have no relationship with Taylor, Holmes ALP or the clients involved. The investigation began on January 10, 2013 when you and the other investigator assigned to these complaints met with Taylor.
Required: Prepare the memo requested by the quality control committee partner. Page 1 of 5 Exhibit 1 Information about Tim Taylor, Public Accountant and Holmes ALP Tim Taylor, Public Accountant In 1998, Taylor graduated from a business degree and began working at a small public accounting firm. He later passed his accounting professional exams and began working his way up in the firm. In 2007, Taylor requested to be put on the “partner track” at the firm but the request was not granted. As a result, in the Fall of 2007, Taylor began his employment at Holmes ALP with an agreement that he would be made partner within five years.
Taylor was originally hired as a senior manager and was given some of Holmes Alp’s larger clients. Pleased with his performance in the first three years at the rim, the existing partners at Holmes ALP signed an agreement with Taylor to make him a partner by the Fall of 2012 pursuant to certain terms as stated in the agreement. The plan was for Taylor to take over one of the founding partner’s clients as she was planning to retire in 2012. On September 1, 2012, Taylor was admitted to the Holmes ALP partnership by purchasing the retired partners interest.
As a means of announcing this change at the firm, Holmes ALP ran several newspaper advertisements describing Taylor and his experience as well as congratulating him for his successful admission into he partnership. These advertisements ran in October 2012. Holmes ALP Holmes ALP is a medium-sized firm that provides a complete range of assurance, advisory and taxation services. The firm has been relatively successful and has grown from three independent small-sized firms to one of the largest mid-size firms in Thrill, Ontario.
Audit of Provident Heights Inc. On October 11, 201 2, the PC received a written complaint from the new majority shareholder of Provident Heights Inc. (PHI) regarding the company’s audit for the year ended August 31, 2012. In the letter, she alleged the following: Taylor was the partner on the audit and he did not contact the predecessor auditors before accepting the engagement. At the time, the majority shareholder thought this was odd but Taylor assured her that he was not required to do so.
Since the majority shareholder was anxious to change audit firms because of past issues with management fraud and the company’s filing deadline, she did not follow up on the matter. However, when she saw the advertisement in the newspaper, she thought that she was reminded that she wanted to look into this further and realized that it may be something the PC would be interested in earring. o When the majority shareholder was expressing her concerns to PHI’s SCOFF, the SCOFF confided that he thought the audit was completed too quickly, especially due to the issues at PHI in the past year. Age 2 of 5 Exhibit 2 Anonymous Complaint An anonymous whistler’s sent a fax to the PC’s Chairperson on October 13, 2012 regarding the conduct of Taylor. The fax stated that the PC should investigate the June 2012 invoice to Casey Consulting Ltd. (“CLC”) and the related payment. The anonymous whistler’s suggested that Taylor allowed Casey Consulting to write two cheeses to settle the invoice: one queue to the firm and the other to Taylor himself (in the amount of $3,000).
Furthermore, the fax suggested that the PC review some of the larger round number cash deposits in Tailor’s personal bank account for the period of June to August 2012. Page 3 of 5 exhibit 3 Chairperson’s Review Notes from Investigator Review of Provident Heights Inc. (“PHI”) Working Paper Files Audit Planning. We noticed that the planning section of the audit was relatively well done for a first time engagement. However, in the understanding of internal control, we noted hat there was no mention or thought given to the past issues of fraud at PHI.
Based on our understanding, Holmes ALP was hired as the new auditors because PHI had serious issues with several instances of management fraud in the past year. As a result, all top management was replaced and part of the company was sold to the new majority shareholder. All of these changes were part of the company’s objective of a “fresh start” While reviewing the files, I noticed that the audit was fully substantial in nature since PHI had decided to not test financial statement controls. However, I didn’t notice any section of the working papers dedicated to gaining an understanding of Internal Control.
PHI’s files contained working papers documenting the results of its substantive testing. Each section of the work contains a checklist of substantive tests. The tests appear to have been developed specifically for this engagement. The steps on the checklists also appear to have been signed off and cross referenced to the appropriate working papers. This seems to have assured that all procedures designed were completed as well as ensuring that procedures ere performed for each of the major accounts in the Financial Statements.
Memo on Planning. A short memo sets out that the audit will be fully substantive against a materiality of $370,000 and follow the approach used in the previous year’s audit. Accounts Receivable. The audit work in this section included a confirmation of 15 of the largest accounts and 10 other accounts selected at random covering 79% of the entire A/R balance ($6,146,000). All but two of the confirmations were received back with no problems noted. The two confirmations that were not received amounted to $326,000.
Positive confirmations were sent out which requires that any confirmations not received be followed up and received or that other procedures are performed. However, I noted a note that stated “In light of the satisfactory results of the other confirmations, no additional procedures were carried out for these two items. ” A review was done of payments of A/R made by customers that were received after year end. This procedure was performed up to and including the date of the audit report which is a standard audit procedure for most companies. I noted that 8. 5% of the A/R balance at year end was collected.
There is a note included on this schedule that said “Should we look in to this? Last year, 45% of the A/R balance was collected by the date of the audit report. ” However, there seems to be no resolution for this comment. Instead, the conclusion on the schedule is that all payments received after year-end were under $100,000 so no work was performed on the subsequent payments of AIR. Bank indebtedness. This amount was confirmed by the bank. The auditors also noted that this amount had significantly increased from prior year and explained that it was due to the large increase in accounts receivable which would be elected after year end.
Page 4 of 5 Inventory. The audit team attended the inventory count at the company’s warehouse and found no significant issues. Accounts Payable. The variance analysis for accounts payable included an explanation stating “accounts payable is similar to the prior year since there were no new product lines in the year”. This contradicts several other sections in the working paper files that note that there were five new product lines in fiscal 2012. Revenue. I noticed that no additional procedures were performed on revenue despite the fact that it had almost doubled year-over-year.
Legal Expenses. One of the audit team members noticed a large invoice to a law firm regarding “Confidential Matters”. The note to explain this was “The president informed us that this invoice relates to a matter that is confidential and therefore could not be obtained by Holmes ALP. ” Review of Board of Directors Minutes. Minutes from the Board of Directors meetings were included in the file where there is mention of an acquisition proposal that is being considered. There is a question mark beside this comment however this does not appear to have been resolved. Audit Communication Letters.