Oceanview’s Employees’ Integrity

Blaine Bruce
8/27/17

Discussion Questions

1. Favorable:

Responses to inquiries of predecessor auditor were complimentary about Oceanview’s employees’ integrity, competence, and dedication to running a successful business. Predecessor auditor mentioned Oceanview was easy to deal with. The company is locally based and received honest communication and experiences with clients and third parties. Indication that Oceanview has little previous conflict and in these terms likely to be a fairly simple audit. If there is certainty that auditors are completely independent from Oceanview then accepting the audit means that they can provide reasonable assurance that the audit represents a true and fair view of the business reports provided by management and able to provide unbiased opinion for users.

Unfavorable:

No information is provided about the familiarity with Oceanview and therefore this is a concern in regards to accepting the audit. Ensuring that the auditors have no relationship with someone who can influence business decisions through their ability to access financial and nonfinancial information or association with Oceanviews business contracts. There is also a concern that auditors do not have specialized knowledge in the industry therefore audit may require more time, not only that auditors may have insufficient resources to gather all information needed eg staff and therefore more difficult to complete the audit, which they may not want to undertake. It was noted that they previously underpaid tax, possibility that they were involved in illegal acts in regards to this. This raises suspicion that there may have been illegal acts in the preparation of the financial statements to cause the underpaid tax, as the shareholder was previously an auditor himself so he would have the ability to manipulate the financial statements.

2. We do not agree with the decision to accept the client due to several factors. Firstly we are concerned about the threat of familiarity, as Oceanview is local to the auditing company which may led to the possibility that some of our staff may have a close relationship with Oceanview making it difficult to ensure that we are completely independent. Secondly, from the facts we assume that the auditing company may have insufficient resources such as staff and specified knowledge in the industry to complete the audit.

3.

-Gain client by setting an unrealistically low audit fee. This is called low-balling.

-Directors and management placed pressure on auditors to influence auditors’ appointment. Auditor accepts audit so they do not lose the audit to another firm.

-Could indicate some sort of relationship with the client

-May be part of the negotiation

-Intimidation from client, being pressured to reduce the extent of work required in order to reduce fees.

Auditors agree to significantly less than normal in order to obtain the client. Since the auditors can earn quasi-rents (economic rents) from maintaining existing clients due to high initial start-up costs from audits of new clients and due to significant transaction cost incurred by the client when a change in auditor occurs