Many students who pursue their CPA designation, start their careers as junior auditors, at public accounting firms. Assume that you have just been hired, as a junior auditor at Boritz, Kao, Kadous & Co., LLP (BKK) a Canadian public accounting firm with offices located in each of the major cities across Canada.
Your first audit client will be Hillsburg Hardware Limited, a privately owned company located in Halifax, Nova Scotia. Hillsburg is a wholesale distributor of hardware equipment such as power and hand tools and a wide selection of paint products.
The audit team assigned to Hillsburg includes Partner Joe Anthony, Audit Manager Leslie Nagan, Audit Senior Fran Moor, and audit juniors Mitch Bray and you.
Part A (10 marks)
After reading the transcript of the conversation between Mitch and you (AJ) (below), please answer the following questions:
- Identify and list the five audit engagement performance responsibilities that the two partners and managers at the small public accounting firm where Mitch used to work failed to perform. (5 marks)
- Explain how this could impact audit quality. (2 marks)
- Identify and list the elements of audit engagement quality control that were missing at the small public accounting firm where Mitch used to work. Explain how this could impact audit quality. (3 marks)
Transcript:
AJ: Hey Mitch, I didn’t know that you used to work for another public accounting firm before you started to work at BKK, LLP.
MB: Yeah, before coming over to BKK, for about nine months I used to work at a small public accounting firm.
AJ: Did you like working there? MB: It was great. Almost no supervision, no stress. Best job I ever had. AJ: So why did you come to BKK?
MB: There was some kind of a practice inspection, and the two partners who run the firm got into a lot of trouble. There were rumors that CPA may shut the place down. I felt it was the right time to look for another job. But sometimes I miss that place.
AJ: Why? MB: The money wasn’t great, but it was a really chill atmosphere. The two partners were close to retirement and were almost never in the office. The managers were cool, not like here at BKK. The work was much simpler. All I had to do was follow last year’s files and do the same work. Plus, I used to go to clients alone. No one watched and bothered me.
AJ: You used to go to the clients alone?
MB: Yeah, I loved it. Beats having Fran or Leslie always looking over my shoulder, checking what I am doing, making sure it’s done right.
AJ: But how did you know what to do, if you were alone at the client?
MB: I just followed last year’s file. Lots of copy-pasting. If I didn’t understand something, I just skipped it. I think in my entire nine months there I got like one or two review notes from the two managers who were usually nowhere to be found. So, it’s not like anyone cared what I did or didn’t do.
AJ: Wow, that’s really different than how things are run at BKK.
MB: Yeah. Very different. Also, my work computer didn’t have any web browsing restrictions. I could access Facebook, watch YouTube and Netflix on my work computer. Not like here at BKK, where almost every website is restricted.
AJ: Yeah, I hate the web browsing restrictions as well.
Part B (10 marks)
After reading the transcript of the conversation between Mitch and you (AJ) (below), please answer the following questions:
- Identify the type of the potential independence threats that are referenced in the discussion between the audit junior and Mitch and explain if the independence threat is in “fact” or “appearance”. (10 marks)
The following is a conversation between you, audit junior, and Mitch Bray, the other junior assigned to the Hillsburg audit engagement.
MB: Hey. Did you update your social media profiles?
AJ: No, not yet.
MB: I added, BBK LLP. as my current place of employment to my Twitter, LinkedIn, Instagram and Facebook profiles. A couple of weeks after updating my LinkedIn profile, I was actually contacted by a recruiter asking me if I would be interested in a job opportunity at another public accounting firm.
AJ: Oh wow, did you respond back to the recruiter?
MB: No, not yet. Anyway, I wanted to talk to you about something that came up.
AJ: Yes?
MB: Do you remember my friend Peter?
AJ: Yeah, Peter. His parents own a small paint store.
MB: Yes, that Peter. He is trying to help out his parents with their store and came up with a social media advertising campaign to promote Hillsburg’s Dureux paint. He hopes this will turn around the store’s declining sales.
AJ: Hillsburg? The same Hillsburg we are going to begin auditing next week?
MB: Yes, the same Hillsburg. Peter asked me for a favour, and I don’t know what to do.
AJ: What did he ask you for?
MB: Peter wants to give me a couple of cans of the Hillsburg’s Dureux paint for free. In return he wants me to post a photo of the painted room on my social media accounts saying how great the Hillsburg’s Dureux paint is. He also wants me to tweet a link to his parents’ store website and the Hillsburg’s Dureux paint website. He is asking all of his friends to do the same hoping that this promotion goes viral.
AJ: Were you planning to paint your room?
MB: Yes.
AJ: Well, then maybe you should take advantage of the offer.
MB: I think I might. There is also something else.
AJ: Yes?
MB: You know that girl Sarah that I was telling you about?
AJ: Your new girlfriend Sarah?
MB: It turns out that my new girlfriend works at Hillsburg.
AJ: No way!
MB: Sarah just got promoted to be the manager of the accounts payable (“AP”) department at Hillsburg.
AJ: Well, I guess you must be happy about Fran (audit senior) assigning you to the accounts payable section on the Hillsburg audit?
MB: For sure. Sarah is such an amazing hardworking girl. We have been dating for just three months, but everything has been working out great so far. We are thinking of moving in together and starting a family.
AJ: Wow!
MB: I always wanted to get married and have kids and I feel that Sarah is the right girl for me. She just got promoted to the manager position. When her probation ends in about 3 months, she will get a big pay bump. With her new increased salary and my income, together we could qualify for a mortgage that would let us buy a condo together. Alone neither one of us could afford to buy a place to live. Now Sarah just needs to impresses her boss at Hillsburg and get that permanent position.
AJ: Who is Sarah’s boss?
MB: Hillsburg’s CFO. If Sarah passes her probation, the CFO will make her the full-time manager of AP and she will get the big pay increase. This will let us get that condo together.
AJ: Amazing. I hope that everything works out for the two of you. I will just go back to swiping on Tinder! Maybe I will get lucky and finally find someone.
MB: Ha-ha. You will.
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