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Identifying and Evaluating Audit Issues VITALOGISTICS.

Identifying and Evaluating Audit Issues: The Case of VITALOGISTICS

ISSUES IN ACCOUNTING EDUCATION
Vol. 22, No. 1
February 2007
pp. 79-88

Stephen Kwaku Asare and Arnold M. Wright

This case invites you to identify audit issues and evaluate an audit team's judgments and decisions on a new engagement (VITALOGISTICS). You will consider a variety of issues in the client acceptance, planning, execution, and reporting phases of an Integrated Audit. Identifying the audit issues and evaluating the audit team's decisions will enhance your: (1) appreciation of the role of research in audit practice; (2) recognition of the conflicting pressures faced by auditors and the potential for these pressures to compromise audit work; and (3) understanding of the requirements of the Integrated Audit and how it differs from the requirements of an audit of financial statements.

REQUIREMENTS
In addressing the questions below, consult the relevant professional standards of audit- ing and financial reporting. Unless specifically mentioned, assume that standard required audit procedures were completed. Your instructor will identify the requirements you are assigned to complete.

Client Acceptance

1. Did KPVI's client-acceptance process follow the applicable standards and regulations?
Evaluate the engagement letter in light of the decision in the 1136 Tenants' case (1136
Tenants' Corp. v. Max Rothenberg & Co., 36 A.D.2d 804, N.Y. App. Div. 1971).
2. Identify and discuss the pressures faced by Andy Card, the audit partner. How might those pressures affect the decision to accept the client and the performance of the audit?
3. Ace Fritz, an audit manager in the office, was left off the audit team because he owned
5,000 shares of VITALOGISTICS stock. Is KPVI required to disqualify Ace? How does the analysis change if you assume Ace was (a) a partner? (b) an associate?

Planning Phase

4. At the team planning meeting in February 20X4, the audit team set overall audit risk at moderate and concluded that detailed testing of all significant balances was still necessary. Identify and evaluate the factors relevant to these decisions. Explain why you agree or disagree with the decisions made.

Attachments

Solution Preview

1. Did KPVI's client-acceptance process follow the applicable standards and regulations?
Evaluate the engagement letter in light of the decision in the 1136 Tenants' case (1136
Tenants' Corp. v. Max Rothenberg & Co., 36 A.D.2d 804, N.Y. App. Div. 1971).

No, the client-acceptance process did not follow applicable standards. Sarbanes Oxley requires that he audit committee, not management, hire the auditors. Just copying the board on the engagement letter is not sufficient. A copy is just a "keeping you informed" act and not an active decision of the board. The CEO is not allowed to be in charge of the compensation of the audit firm.

U.S. House of Representatives. 2002. The Sarbanes-Oxley Act of 2002. Public Law 107-204 [H. R.
3763]. Washington, D.C.: Government Printing Office.
1136 Tenants' Corp. v. Max Rothenberg & Co., 36 A.D.2d 804, N.Y. App. Div. 1971.

In my opinion, the auditors should have slowed down after getting the initial round of information. The client is aggressive and the accounting staff is too thin. This is not a good recipe in terms of audit risk. At a minimum, the engagement process should have looked a little further. The standard (AU315) that requires that the prior auditor be contacted was followed but the requirement to have an audit ...

Solution Summary

Your tutorial is 660 words plus five references and gives you some ideas about the issues and one possible opinion about each. Some of this is more "debatable" and other parts are clearly wrong or disallowed. This two are separately discussed.

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