University Corporate Auditing: Client Acceptance Case Study Analysis

This case study examines the client acceptance process in corporate auditing, focusing on a scenario involving JAW & Associates, a CPA firm, and a potential client, FSL, a well-established financial institution. The assignment analyzes the positive factors influencing the acceptance of the audit engagement, such as FSL's market reputation and the controller's effective accounting practices. It also highlights the warning signs and negative factors, including fluctuations in asset value, issues with journal entries, aggressive behavior of the CEO, and the controller's lack of professional certification. The solution provides a memo to all partners recommending not to accept the audit engagement due to the presence of significant risks and potential problems. The analysis emphasizes the importance of evaluating client risk and making informed decisions in the context of corporate auditing.

Running head: CORPORATE AUDITING
Corporate Auditing
Name of the Student
Name of the University
Author’s Note

1CORPORATE AUDITING
Table of Contents
Answer to Question 1.................................................................................................................2
Requirement (a)......................................................................................................................2
Requirement (b).....................................................................................................................2
Answer to Question 2.................................................................................................................4
References..................................................................................................................................5

2CORPORATE AUDITING
Answer to Question 1
Requirement (a)
The main reasons for accepting the audit engagement of FSL are shown below along
with reasons of positive factors:
1. FSL has a good reputation in the market for being well-established financial
institution since the company has been operating well for 20 years. The healthier the
financial condition of the client firm the more likely the auditors will have a good
image of the firm. This makes the auditors less motivated to resist the pressure of
management (Coetzee & Lubbe, 2014).
2. Eve, the Chairman of the Board of Directors as well as CEO of FSL has been able in
running the company in well manner even in the presence of business recession. She
has been able in raising quick cash through using short-term certificates of deposit
(CDs) and in selling large portfolios of loans in order to avoid reissuing. All these
aspects create a positive perception in the mind of the auditors about the company and
the owners which help in accepting the audit engagement.
3. The controller of FSL has been able in maintaining the accounting records in an
effective and efficient manner which has positive impact on the assessment. In the
presence of well-maintained financial information, it becomes easy for the auditors to
obtain the required financial and accounting information of the company at the time
of auditing. This create positive impact on the audit engagement decision-making
(Ittonen & Trønnes, 2014).

3CORPORATE AUDITING
Requirement (b)
Apart from the above positive reasons, there are certain warning signs or negative
factors that can lead to not accepting the audit engagement. These reasons are mentioned
below with reasons:
1. There has been fluctuations in the total assets’ value over the last five years and the
stockholder’s equity is higher than the industry average. FSL only has one kind of
debt which are related to depositor’s account. These unusual financial conditions of
the company are warning signs for the auditors where the auditors are needed to be
careful while dealing with the client’s financial condition (Byrnes et al., 2018).
2. As per the previous auditor, FSL had not made adequate and appropriate journal
entries and Eve is not ready to agree with the fact. She only wants to get unqualified
audit opinion in spite of these flaws. This creates a negative perspective in the mind of
auditor about FSL and Eve which can lead to non-acceptance of the audit engagement
(Ettredge, Fuerherm & Li, 2014).
3. Eve has a tendency to discount the loans heavily so that she has to pay only a portion
of their face value and bought them with resources. This manipulative work of Eve
strengthens the liquidity position of the company in a negative manner (Wang, Yu &
Zhao, 2014).
4. The financial controller of FSL does not have any professional certified degree in
accounting which can cause many mistakes in financial and accounting procedures.
This can lead to non-acceptance of the audit engagement (Martin, 2013).
5. As per Matt’s business contacts, Eve has an aggressive behaviour and she does not
tolerate errors. This creates negative perception in the mind of auditors about Eve and
this can lead to non-acceptance of the audit engagement.

4CORPORATE AUDITING
6. Eve has a tendency of not paying the financial obligations timely as she uses to
renegotiate charges before making payment. This is not a good practice and this
creates negative perception about eve at the time of assessment (Wang, Yu & Zhao,
2014).

5CORPORATE AUDITING
Answer to Question 2
MEMO
To: All Partners of the Audit Engagement
From: The Partner in charge
Date: 28th July, 2019
Re: Background Review of FSL and Recommendation
This memo provides the information on the background review of FSL for the purpose of
audit engagement. For the positives, FSL has a good market reputation for being a well-
established financial institute where the financial records are maintained in proper manner.
However, there are large number of warnings signs that can create potential future problems
in auditing. FSL has large fluctuation in the value of total assets and all the debts are related
to only deposit accounts. Adequate journal entries have not been passed and Eve is not
willing to make these additional journal entries since it would not provide unqualified audit
report. Moreover, Eve has a tendency of heavily discussion the loans and to make
renegotiation before paying the financial obligation. Lastly, FSL has the tendency to make
late payment of the audit fees. In the presence of all of these negative aspects or warning
signs, the auditors will have to face future problems while continuing the audit of FSL. Thus,
it is recommended not to accept the audit engagement of FSL.

6CORPORATE AUDITING
References
Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., &
Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297).
Emerald Publishing Limited.
Coetzee, P., & Lubbe, D. (2014). Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), 115-125.
Ettredge, M., Fuerherm, E. E., & Li, C. (2014). Fee pressure and audit quality. Accounting,
Organizations and Society, 39(4), 247-263.
Ittonen, K., & Trønnes, P. C. (2014). Benefits and costs of appointing joint audit engagement
partners. Auditing: A Journal of Practice & Theory, 34(3), 23-46.
Martin, R. D. (2013). Audit quality indicators: Audit practice meets audit research. Current
issues in auditing, 7(2), A17-A23.
Wang, Y., Yu, L., & Zhao, Y. (2014). The association between audit-partner quality and
engagement quality: Evidence from financial report misstatements. Auditing: A
Journal of Practice & Theory, 34(3), 81-111.