Lakeside – Case 3, Discussion Question 6

Ideally you will have consulted your Handbook and noticed that the title of ASA 315 appears most relevant to this question … the sources of information are specifically detailed at ASA 315.5-11, A17-A41. Your attention is drawn to ASA 315.6-7 in light of the discussions and questions from Cases 1 and 2 with Rogers and King & Co. You might also check out APES 110.210.6 (pre 2018) or 110.320.3 A4 (post 2018).

Knowledge of the consumer electronics business is just one aspect of Dan Cline’s experience and expertise that will allow him to evaluate the fair presentation of Lakeside’s financial statements. Overall knowledge of Lakeside (or any new client you are taking on) and the industry in which it operates should allow Cline to:

• identify areas that may need special consideration,
• assess conditions under which accounting data are produced, processed, reviewed & accumulated at Lakeside,
• evaluate the reasonableness of estimates,
• evaluate the accuracy of management representations (recall the interview in Case 1 with Rogers?)
• make judgements about the appropriateness of the accounting principles applied and the adequacy of disclosures.

NOTE: this is a good opportunity to demonstrate how the first half of this unit provides the principles of quality control that are applied as the testing occurs during the audit. For example, review this suggested solution in the context of the information presented in the Introductory, first and second Lakeside cases. You are reminded that the meeting with Rogers (Case 1) constitutes oral evidence (ASA 500.A26-A29, A35). Importantly, this oral evidence has now been documented in your work papers (ASA 230.10)! Why “importantly”? Since oral evidence is not a strong type of evidence, you needed to corroborate the matters raised and noted. The more corroboration on each matter you obtain as your audit unfolds, the more you will be comfortable that you have obtained sufficient and appropriate audit evidence (ASA 500.A5, A31-A34). If you recall Case 2, there was a similar dialogue presented with King & Co., the previous auditor. You ought to appreciate the corroboration that this “independent” source provides to Rogers’ views. On what points did they agree (independent corroboration – even though only oral, the nature of the source makes it more reliable than Rogers) and disagree? What weight was alleviated or added by these agreements or disagreements? You should be able to see how this information gathering about the client and their business/industry is important to audit planning. Just be aware that you will explore the persuasiveness of evidence as you move through subsequent Modules – you have only been introduced to the concept at this point.