1.

Why would the owners of Lakeside as well as the companys banks require that an independent
CPA firm perform the annual audit? The reason that there needs to be an independent auditor
is so that they can remain unbiased. It could potentially make them less independent if they are
auditing both Lakeside and the bank in which Lakeside is taking loans from. The auditing firm
needs to stay independent in mind and appearance and this may be an issue when auditing
both.

2. This case implies that no auditor with the firm of Abernethy and Chapman has an in-depth
understanding of the consumer electronics industry. Is a CPA firm allowed to accept an
engagement without having established the necessary expertise to oversee the audit? The first
general standard of Generally Accepted Auditing Standards is that the auditor must have
formal education in auditing and accounting, adequate practical experience for the work being
performed, and continuing professional education (Kursh, Lant, et Al, 2014, pgs. 32-33).
Therefore they should not accept the engagement. Would the knowledge required to audit a
consumer electronics company differ significantly from that needed in the examination of a car
dealership? The knowledge required to audit a consumer electronics company is significantly
different than that needed to audit a car dealership. Does the auditor have an obligation to
discuss his lack of expertise, or his plans to obtain the expertise with the client? The auditor
does have an ethical obligation to discuss his lack of expertise, as well as discussing if he plans
on hiring someone with expertise specifically for this client.

4 Rogers wants Abernethy and Chapman to assist his company in developing new accounting
systems. Does a CPA firm face an independence problem in auditing the output of systems that
the same firm designed and installed? Yes, if a CPA firm were to develop new accounting
systems specifically for the company then they would lack the independence needed to test
them. Therefore Rogers should have hired a consulting or software development company to
help develop a new accounting system as it could not have been completed by the auditing firm
doing the current audit. Also, since this is a public company the SEC website states: Financial
information systems design and implementation. Designing and implementing a hardware or
software system used to generate information that is significant to the audit client's financial
statements may create a mutual interest between the client and the accountant in the success
of that system, supplant a fundamental business function, or result in the accountant auditing
his or her own work (SEC, 2000, para 18). Does your answer depend on if the client is publicly
traded or not, how so? Yes, publicly traded companies are monitored by the AICPA Code of
Professional Conduct requirements which do allow this.

Kursch, Steven R., Lant, Theresa K., Majeske, Karl D, Oliver, James M., Plant, R (2014). Auditing and
Assurance Services (14th ed.). Boston, MA: Pearson Learning Solutions.
SEC. (2000, June 27). Fact Sheet: The Commissions Proposal To Modernize the Rules Governing the
Independence of the Accounting Profession. Retrieved August 17, 2014, from,
http://www.sec.gov/news/extra/audfact.htm.
Case 1 - Exercise 1
Abernethy and Chapman
Fraud Risk Factors


Client: Lakeside Company
Prepared by: Brandy Craig
Date: March 2012

List the fraud risk factors that the CPA firm might encounter if they accept this audit engagement. Be sure
to include a discussion of all items that will probably require special attention during the audit. For each of
these fraud risk factors, indicate how the auditor should follow up on each potential problem if the
engagement is accepted. Use the following format:


Fraud Risk Factors Auditor Follow Up
Management may have the incentive to overstate
the income since their raises are directly tied to
income
Testing should be completed to verify all revenue
from stores.
Abernathy and Chapman use the same back that
Rogers does.
All issues related to independence should be
considered.
Lack of Expertise A skilled person should be hired to handle this audit.
Similar electronic companies have bankrupt recently Factors about the stability of the industry should be
reviewed.
Sales and Returns The timing between sales and returns would need
to be looked at to verify that false sales arent being
recorded due to timing differences.
New Business strategies Look into the business strategy and the mission
statement of company as well as speaking with
upper management.
Misappropriation of assets Inventory would need to be audited
Unhappy with previous firm Rogers does not like the previous firm because he
did not like the qualified status that they gave his
company.
Unwillingness to fix the previous audit They would need to figure out why there was an
unwillingness to fix the previous audit by speaking
to upper management.


Case 1 - Exercise 2

King and Company
PRO FORMA AUDITOR'S REPORT


To: Benjamin M. Rogers
Lakeside Company
We have audited the accompanying balance sheet of Lakeside Company as of December 31, 2011, and the related
statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
The value of Lakesides $186,000 investment in its latest store is impaired based on guidelines established by the
FASB. In our opinion Lakeside should write down the reported value of the property.
In our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements
referred to above do not present fairly, in conformity with accounting principles generally accepted in the United
States of America, the financial position of the Lakeside Company at December 31, 2011, or the results of its
operations and its cash flows for the year then ended.
As discussed previously the value of Lakesides sixth store is currently held at historical value and is impaired,
needing to be written down to fair market value. The shopping center that is adjacent to the store has proven to
be very unsuccessful and has only leased 40% of available spaces. Lakeside has not been able to generate the
customer traffic necessary to come close to a break-even point. Lakeside will have considerable trouble in
disposing of the store if necessary.

King and Company,Certified Public Accountants
Date: December 31, 2011