Jose Luis Rubio Bustamante

ACCT 4334.001
Case 2

Communications between Predecessor and Successor Auditors.

Assume that Smith & Smith, CPAs, audited Apollo Shoes Inc., last year. Now
CEO Larry Lancaster wishes to engage Anderson, Olds, and Watershed, CPAs
(AOW) to audit its annual financial state- ments. Lancaster is generally pleased
with the services 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.
Required:
List and discuss the steps AOW should follow with regard to dealing with a
predecessor auditor and a new client before accepting the engagement.

Answer
First of all it has to be noted that SAS No.84 describes the successor, which in
this case is AOW as: an auditor who is considering accepting an engagement to
audit financial statements, but who has not communicated with the predecessor, .
. . and an auditor who has accepted such an engagement. Also SAS No. 84
states that an attempt to communicate with the predecessor (Smith & Smith) has
to be done by the successor, if permitted by the client. This means that even if

AOW has not accepted an engagement with Lancaster, AOW has to try to
contact Smith & Smith for information about the client. In the communication with
Smith & Smith, AOW should inquire about the cause of auditor change, any
information that puts managers integrity to question, any disagreements with
management, while also inquiring about anything that may have alter the
predecessor for a fraud or illegal act during the predecessors work period. As
stated AOW is required to attempt communication with Smith & Smith if permitted
by the prospective client, there is no consequence or sanction in SAS No. 48 for
AOW for not engaging in reciprocal communication with Smith & Smith because
the predecessor is not interested or because the client does not permitted. In this
case Lancaster does not permit AOW to communicate Smith & Smith, even
though there is no sanction for AOW for not being able to contact its predecessor,
AOW should be hesitant to engage in Auditing services with Lancaster. The
Auditor should consider if it is safe to go into an engagement with Lancaster
knowing its negative position towards contacting Smith & Smith. The auditor
should also take in consideration the factors that might take Lancaster to this
position. This attitude might not be to try to hide a fraud, illegal activity or material
misplacement that was noticed by the
predecessor, although how trustworthy can be a company that does not let the
new auditor to contact its predecessor, if the only responsibility of the later was to
give an opinion on the companys financial statements.