Question

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 statements. 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: Put in order the steps AOW should follow with regard to dealing with a predecessor auditor and a new client before accepting the engagement.

Answer 1

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 predecessor’s 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 company’s financial statements.