Auditing Case 2

Case Study 2
Communication between Predecessor and Prospective Auditors.
Assume that Smith &Smith,CPAs,audited Apollo Shoes,Inc.,last year. Now CEO Larry Lancaster wishes to engage AOW,CPAs to audit its annual financial statement. Lancaster is generally pleased with the service provided by Smith&Smith,but he thinks the audit work was too detailed and interfered excessively with normal office routines. AOW has asked Lancaster to inform Smith&Smith of the decision to change auditors,but he does not wish to do so.
List and discuss the steps AOW should follow with regard to dealing with a predecessor auditor and a new client before accepting the engagement.
In this Case,AOW is the prospective auditor.In order to reduce the risk of accepting a problem client,auditing standards require a prospective auditors to initiate contact with and attempt to obtain basic information directly from the predecessor.An auditor should not accept an engagement until the communications described in the following paragraphs have been evaluated
First the prospective auditor should request permission from the client to make an inquiry of the predecessor auditor. The successor auditor should ask the client to authorize the predecessor auditor to respond to the successor auditor's inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement.
After the client grants its approval,Inquiry of the predecessor auditor is a necessary procedure because the predecessor auditor may be able to provide information that will assist the successor auditor in determining whether to accept the engagement. The prospective auditor should make specific and reasonable inquiries of the predecessor auditor regarding matters that will assist them to determine whether to accept the engagement. Matters subject to inquiry should include Information that might bear on the integrity of management.
Obtaining and reviewing financial information about the prospective client:annual reports,interim statements,registration statement and Form 10-Ks
Disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters.
Communications to audit committees or others with equivalent
authority and responsibility regarding fraud, illegal acts by clients, and internal-control-related matters.
The predecessor auditor's understanding as to the reasons for the change of auditors.
The predecessor auditor should respond promptly and fully, on the basis of known facts, to the successor auditor's reasonable inquiries. However, if the predecessor auditor decide, due to unusual circumstances such as threatened or potential litigation, not to respond fully to the inquiries, the predecessor auditor should clearly state that the response is limited. If the successor auditor receives a limited response, its implications should be considered in deciding whether to accept the engagement.。