Case 5.5 – KOGER PROPERTIES, INC. I.
ANSWERS TO QUESTIONS 1. Give Given n that that Good Goodbr brea ead d purc purcha hase sed d stoc stock k of Koger oger Prop Proper erti ties es in 1998, under what conditions, if any, could he have later served as the audit engagement partner for the company Holding a fnancial interest in an audit client may create a selinter interest est threat threat.. The exist existenc ence e and sig signif nifcan cance ce o any threat threat crea create ted d depe depend nds s on: on: (a) (a) the the role ole o the the pers person on hold holdin ing g the the fnancial interest, (b) whether the fnancial interest is direct or indirect, and (c) the materiality o the fnancial interest. other partners in the o!ce in which the engagement partner practi practices ces in connec connectio tion n with with the audit audit engage engagemen ment, t, or their their immediate amily members, hold a direct fnancial interest or a material indirect fnancial interest in that audit client, the selinterest threat threat created would be so signifcant that no saeguards could reduce the threat to an acceptable le"el.
#wning shares o stoc$ in an entity is clearly a direct fnancial interest in the enti entity ty.. %ccor ccordi ding ngly ly,, sect sectio ion n &' &'. .' '.b .b o the the odi odifc fcat atio ion n o *inan inanci cial al +eporting olicies (*+) states that any stoc$ ownership in a client impairs independence, and that materiality is not a consideration in the case o a direct fnancial interest. Howe"er, it was not ust his status as engagement partner on the audit that caused a lac$ o independence, but also his status as a partner o a frm that that is the auditor o recor record d or an /0 registrant registrant.. %s noted abo"e, it is clear that a direct fnancial interest by any member o an accounting accounting frm frm would impair impair the frm1s frm1s independence. independence. The rule goes on to say that the term member means (i) all partners, shareholders, and other pri princip ncipal als s in the the frm frm. Thus Thus e"e e"en i 2oodb oodbrread ead had had not not been been the the engagement partner or the 3oger audit, his ownership o 3oger stoc$ was a direct "iolation o the independence rule. odifcation o *inancial +eporting olicies (*+) states that any stoc$ ownership in a client impairs independence, and that materiality is not a consideration in the case o a direct fnancial interest. !. "uri uring much of the nineteen century in Great #ritain ain, inde indepe pend nden ence ce audit auditor ors s were were not not allo allowe wed d to have have an e$ui e$uity ty interest in their clients but were re$uired to invest in their clients in certain circumstances. %&plain the rationale likely underlying
that rule. 'make sense( in today)s business environment in the *nites +tates "efend your answer. answer.
. -he -he +% +% char charge ged d that that Good Goodbr brea ead d viol violat ated ed its its inde indepe pende ndenc nce e rules, the /0P/)s ode of Professional onduct, and generally accepted auditing standars G//+2. %&plain the +%)s rationale in making each of those allegations. Violation of Commissions In!e"en!en#e R$les 3oger1s fnancial statements were re4uired to be audited by an independent accountant or the fscal year ended 5arch 67,788'. an accountant will be considered not independent with respect to any person...in which...he, his frm or a member o his frm had, or was committed to ac4uire, any direct fnancial interest or any material indirect indirect fnancial interest... interest... #wning shares shares o stoc$ in an entity is clearly a direct fnancial fnancial interest in the entity. entity. %ccordingly, %ccordingly, section &'.'.b o the odifcation o*inancial +eporting olicies (*+) states that any stoc$ ownership in a client impairs independence, and that materiality is not a consideration in the case o a direct fnancial interest. Howe"er, it was not ust his status as engagement partner on the audit that caused a lac$ o independence, but also his status as a partner o a frm that is the auditor o record record or an /0 registrant. %s noted abo"e, it is clear that a direct direct fnancial inte interrest est by any memb member er o an acco accoun unti ting ng frm frm woul would d impai impairr the the frm1 frm1s s independence. The rule goes on to say that the term member member means means (i) all partne partners, rs, shareho shareholde lders, rs, and other other princi principal pals s in the frm. frm. Thus Thus e"en e"en i 2oodbread had not been the engagement partner or the 3oger audit, his ownership o 3oger stoc$ was a direct "iolation o the independence rule. Violation of GAAS an! Co!e of Et%i#s The %% %% ode o roessional roessional onduct expressly expressly prohibited 2oodbread1s 3oger stoc$ ownership during during the time o the 3oger 3oger audit. The ode states that 9independence shall be considered to be impaired i . . . during the period o a proessional engagement, or at the time o expressing expressing an opinion, a member or a memb member er1s 1s frm frm . . . 9ha 9had d or was was comm commit itte ted d to ac4u ac4uir ire e any any dir direct ect or material indirect fnancial interest in the enterprise. an auditor is not independent, any procedures he might perorm would not be in accor accordan dance ce with with gener generall ally y accept accepted ed auditi auditing ng standa standard rds s and he woul would d be prec preclu lude ded d rom rom expr xpressi essing ng an opin opinio ion n on su such ch stat statem emen ents ts. . %ccor %c cordin dingly gly,, under under such such circum circumstan stance ces, s, 2%%/ re4uire e4uires s an accoun accountan tantt to disclaim an opinion with respect to the fnancial statements and to state specifcally that he is not independent.
2oodbr 2oodbread ead held held a direct direct owner ownershi ship p inter interest est in 3oger oger stoc$ stoc$ while while participating in the initial phases o the audit o 3oger1s fnancial statements. ;otwithstanding this lac$ o independence rom 3oger, 2oodbread caused nder >nder the circums circumstan tances ces,, 2oodbr 2oodbread ead1s 1s ownershi ownership p o stoc$ specifcally precluded any representation that the audit was conducted in accordance with 2%%/ and re4uired 2oodbread to ma$e sure that
percentage o 2oodbread ownershipin 3ogerBs stoc$s is less than FG. ;o, 2oodbreadBs e4uity interest in 3oger roperties would not 4ualiy 4ualiy as a Cmaterial CmaterialDin"e Din"estmen stmentt or him. %ccording %ccording to /0Bs +egul egulat atio ion n /-J /-J K +ule ule -'7 -'7,, fnanc fnancia iall inte interrests ests that thatii mpai mpairr independen independence ce is Cthat any partner partner or e4ui"alen e4ui"alent, t, proessi proessional onal employee o the accountingfrm, or his or her immediate amily, or any group o the abo"e persons has fled a /chedule 76./ (>./.. /ecu /ecuri riti ties es and and 0xchange ommission, '7'). #n the other hand, under%%Bs +ules ules o ond onduc uctt K +ule ule 7' 7'7, 7, fnanc fnancia iall inte interrests ests that that impai impairr independence is that Canypartner or proessional employee o the accounting frm, his or her immediate amily, or anygroup o such persons acting together has a fnancial interest exceeding F G o a clientBsoutstanding e4uity securities or other ownership inte interrests estsD D (% (% %, ' '7' 7'). ). Thes These e rule rules s ares aresub ubst stant antia iall lly y the the same.% same.%cco ccorrdingly dingly,, the term term Cmater Cmaterial ial in"est in"estme mentD ntD does does not includ include e owners ownership hip by any partne partnero rorr e4ui" e4ui"ale alent, nt, proe proessi ssional onal empl employ oyee ee o the the acc account ountin ing g frm, his his or her her imm immediat diate e amilymembers, or any group o the abo"e persons o FG or less o a client clientBs Bs outsta outstandi nding ng share shares s ostoc ostoc$, $, e4uity e4uity securi securitie ties, s, or othe otherr owne owners rshi hip p inte interrests ests.. C*or purp purpos oses es o dete deterrmini mining ng materialit materiality,the y,the fnancial interests interests o the co"ere co"ered d member member and immedi immediate ate amily amily should should be aggre aggregat gatedD edD(3n (3napp app,, +itten +ittenber berg, g, Lohnstone, = 2ramling, '77, p.8A). mmediate amily members consist oa spouse, a spousal e4ui"alent, or dependents (%llen, ''7). n this case, 2oodbread purchasedA'' shares o 3ogerBs comm common on stoc stoc$ $ in
II. II.
CON CONC'U C'USIO SION(RE N(RECO CO)) ))EN EN*A *AT TIONS IONS
Case +. – TO))- OCONNE'', AU*IT SENIOR
I.
/ACTS O/ T0E CASE 7. Tommy ommy #1onn #1onnell ell had been a senior senior or only a short short time beor beore e being assigned to the %ltamesa audit engagement. . Tommy wanted wanted to impress impress his superiors superiors and ad"ance ad"ance as rapidly as possible within his frm. 6. Tommy ommy was plea please sed d when when he lear learne ned d o his his assi assign gnme ment nt to the the di!cult %ltamesa engagement because it signaled that his superiors highly regarded his wor$. A. The %ltamesa %ltamesa audit audit was a di!cult di!cult engagement engagement in part part because the the comp company any1s 1s mana manage geme ment nt too$ too$ aggr aggressi essi"e "e posi positi tion ons s on $ey accounting issues. F. The %ltame %ltamesa sa assign assignme ment nt re4uir re4uired ed Tomm Tommy y to be out o town town or se"eral wee$s, which did not ma$e his wie happyMshe had already complained regarding the long hours he wor$ed. &. Tommy ommy appar apparent ently ly did not li$e li$e arl arl ilm ilmeth eth and, as a result, esult, was upset when he learned that arl would be his subordinate on the %ltamesa engagement. N. The two seniors seniors who arl had wor$e wor$ed d or pre"iousl pre"iously y suspected suspected that he had signed oO on audit procedures that he had not completed. I. < ur ur in in g t he he c ou ou rs rs e o t he he % lt lt am am es es a e ng ng ag ag em em en en t, t, To mm mm y suspected that arl was not completing all o his assigned tas$s.
8. ?eca ?ecaus use e he was was so busy busy wor$ wor$in ing g on othe otherr matte atters rs duri during ng the the %ltamesa engagement, Tommy did not ta$e the time to in"estigate his suspicions regarding arlBs wor$. 7'. Tommy ne"er discussed his suspicions regarding arlBs wor$ with the audit engagement partner.
II.
ANSWERS TO QUESTIONS 1. 7ow, 7ow, assume assumed d that that ack ack orris orrison on is revie reviewin wing g the /ltame /ltamesa sa work papers. -o date, you -ommy2 -ommy2 have said nothing to orrison about your suspicions regarding arl, you have a professional respo responsi nsibi bili lity ty the the respo responsi nsibi bili lity ty to rais raise e this this matt matter er now now with with orrison %&plain. PPPP PPPP Qes, ha"e ha"e the respo responsi nsibil bility ity to inor inorm m 5orri 5orrison son about about my suspicion regarding arl because as a proessional should ha"e ethic to tell the act or truth. CD %ccording to rule 7'- ntegrity and #bect #becti" i"ity ity. n the peror perorman mance ce o any proes proessio sional nal ser"ice ser"ice,, a membe memberr shall shall maintai maintain n obect obecti"i i"ity ty and integr integrity ity,, shall shall be ree ree o conR conRic ictt o inte interrest, est, and and sh shal alll not not $now $nowin ingl gly y misp misprresen esentt act act or subordinatesD !. ompar ompare e and contras contrastt the profess profession ional al roles roles of an audit audit superior superior and and sta: sta: acco accoun unta tant nt.. 0n your your anal analys ysis is,, consi conside derr the the di:e di:ere rent nt responsibilities assigned to each regarding the ;ob ?ead client audit engagement 4bta 4btain in a thor thorou ough gh unde unders rsttandi anding ng of P/4 P/4# # and and gene genera rall lly y accepted auditing standards, audit procedures and techni$ues. +uperv +upervise ise,, train train and mentor mentor associ associate ates s and intern interns s on audit audit process. @esearch and analyAe =nancial statement and audit process. • •
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/c$uire a working knowledge of the client)s client)s business. Proact Proactiv ively ely inter interact act with with key client client)s )s manage manageme ment nt to gather gather information, resolve problems and ake recommendations for business and process improvements. 66666 -hese de=nitely makes an audit senior more stressful.
+ta: /ccountant> •
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Perfor Perform m a varie variety ty of public public accoun accountin ting g dutie duties s with with gener general al knowledge of most areas of practice 0nteract with clients to help audit team eBciency. omm ommun unic icat ate e audi auditi ting ng matt matter ers s and and prob proble lem ms to +eni +enior or /ssociates, anagers and partners. /c$uire a working knowledge of the client)s client)s business.
. /ssume /ssume that at some point -ommy -ommy told told orrison orrison that he suspected suspected arl arl was not comple completin ting g his assign assigned ed tasks. tasks. -he only only eviden evidence ce -ommy had to support his theories was the fact that arl had come in signi=cantly under budget on every ma;or task assigned to hi over a period of several months. 0f you were ack orrison, how would you have handled this matter PPP will chec$ i the issue regarding arl is really true or not. it did happened, will tal$ to arl and remind him that all wor$s in the frm need ocus and need attention because i something happens unortunate, the associate, the partners and frm are at sta$e. Bll tal$ to him as a warning or him to do his wor$ wor$ better. better. 4. /gain,
assume that you are -ommy. ommy. arl is badgering you something to do midway through the /ltamesa ;ob. Cou suspect that he is not completing all his assigned procedures, but at the time ime you you are are wrestl estliing with with an impo imporrtant tant and and conte ontent ntio ious us accounting issue. 5hat would you do at this point 5hat could you do to con= con=rm rm your your su susp spic icio ions ns that that arl arl is not not comp comple leti ting ng his his assignments
66666 4f course, =rst, 0 will focus in the important matters regarding audit procedure where my full attention re$uires. /nd later on, 0 will ask arl to have a report regarding to his assignment and verify it on my own understanding understanding to con=rm if he did his thing or not.
5. /ssume
that you are -ommy 4)onnell and have learned that arl 5ilmeth will be working for you on the /ltamesa audit engagement. 5ould you handle this situation in any di:erently than -ommy did %&plain. 1111 will reect arl as my assistant. ?ecause as auditor whether itBs itBs seni senior or or staO staO,, must must ha"e ha"e or ormal mal educ educat atio ion n trai traini ning ng and and profciency to perorm audit. ?ased on what B"e heard about the perormance o arl, will open up to 5orrison and inorm him about what B"e heard regarding arl and as$ that would li$e another staO accountant since this is my frst big proect.
III. III.
CONC CONC' 'USIO USION( N(RE RECO CO)) ))EN EN*A *ATI TION ON
#ne could easily argue that audit seniors occupy the most crit ical role on an aud it enga engage geme ment nt.. n most most audit audit enga engage geme ment nts, s, audit audit senior seniors s person personall ally y o"erse o"ersee e the feldwo feldwor$. r$. n this this role, role, senior seniors s super" super"ise ise,, monitor, and re"iew the wor$ o staO accountants, who typically collect most o the audit e"idence on an engagement. n addition, seniors are usually re4uired re4uired to do whatBs best or the entire frm including the associates. recom ecomme mend nd that that ther there e will will be a wee$ wee$ly ly or mont monthl hly y meet meetin ing g o seni senior or acco accoun unta tant nts s or or e"al e"aluat uatio ion n or or the the per peror orma manc nce e o the the asso associ ciat ates es,, the the progress progress regarding regarding audit, the issues issues need to be tac$led and others others so that e"erything will be gi"en proper action and a"oid conRicts in the uture.
