Lakeside – Case 2, Exercise 2

Where did you begin your research for this answer? Hopefully, you identified that the key issue is obtaining information from the predecessor (previous) auditor about three main things: (1) the reason for the modified opinion last year, (2) the basis of the concerns about internal control expressed in the discussions in Case 2, and (3) the reliability of the opening balances (which are the closing balances audited for last year and recorded in the previous auditor’s workpapers). I wonder if there is an ASA that offers guidance about first time (initial) audit engagements – perhaps the Table of Contents in the Handbook will help??

There are a number of things you can do when reviewing the work papers of King & Co (that is, the audit documentation of the predecessor auditor). The main objective is to examine the types of information that would be available to us if this had been a recurring (or continuing) engagement – think of these as your permanent and current working paper files if your firm had conducted last year’s audit. This review would allow us to gain satisfaction about the validity of the opening balances and accounting policies (principles) adopted by Lakeside (ASA 510.6c(i), A3-A7 and note the way this requires you to check on the competence of that auditor - see ASA 600.19 - 20 and A32 - A38 for guidance on how to evaluate that competence, and reflect on the concept of due skill and care from Topic 2). This reliance on the work of King & Co can minimise the extensive review usually involved in an initial audit – as you get to know the new client. Other matters that might be reviewed include:

• determine satisfactory evidence has been obtained to verify opening balances of accounts such as inventory, land, buildings, equipment, capital, retained earnings,
• identify the accounting policies & principles adopted in the previous year,
• review internal control evaluations, especially noting any strengths or weaknesses documented,
• review the documentation & analysis of any contingencies,
• identify any problem areas documented in the previous year,
• review any adjusting entries proposed by King & Co to determine the type and materiality of the adjustments.

Again, as noted in earlier suggested solutions, you ought to be able to clearly make the connection between this review and the audit planning and quality review processes you have been studying.