Question

Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit and he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation needed the audit to obtain a substantial amount of additional fi nancing to acquire another company. Presently, Tierra Corporation is successful, profi table, and committed to growth. The audit fee for the engagement should be substantial. Since Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that Tower & Tower wanted to do the work. Potter then mentioned that Tower & Tower’s quality control policies require an investigation of new clients and approval by the managing partner, Lee Tower.
Potter obtained the authorization of Edmond to make the necessary inquiries for the new client investigation. Edmond was found to be a highly respected member of the community. Also, Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative. As a final part of the investigation process, Potter contacted Edmond’s former tax accountant, Bill Turner. Potter was surprised to discover that Turner did not share the others’ high opinion of Edmond. Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of a large capital loss reported on the sale of a tract of land to a trust. Edmond told the IRS agent that he had lost all the supporting documentation for the transaction, and that he had no way of finding out the names of the principals of the trust. A search by an IRS
auditor revealed that the land was recorded in the name of Edmond’s married daughter and that Edmond himself was listed as the trustee. The IRS disallowed the loss and Edmond was assessed a civil fraud penalty. Potter was concerned about these findings, but eventually concluded that Edmond had probably matured to a point where he would not engage in such activities.

Based on the case above, respond to the following prompts:
a. Present arguments supporting a decision to accept Tierra Corporation as an audit client.
b. Present arguments supporting a decision not to accept Tierra Corporation as an audit
client.
c. Assuming that you are Lee Tower, set forth your decision regarding acceptance of the client,
identifying those arguments from part (a) or part (b) that you found most persuasive.

Your assignment should be submitted in a Word document and follow proper APA formatting. This assignment should be approximately three pages in length.

Answer 1

The answers to the question have been given below

a. The arguments supporting a decision to accept Tierra would be

• Some engagements in in auditing are known to have more risks compared to some others. The auditors are to create detailed audit programs.
• They should not deny to carry out auditing engagements based on the fact that it appears tough.
• The chairman of the organization may be seen to be a mature person that would not do questionable things.

b. The arguments that would be there would be

• If the IRS should say that Edmond does not have the integrity then it would be the best thing to associate him with the organization
• Routine auditing are a way that can help to detect the frauds that take place in management.
• If they do not want to get questioned based on their reputation, they have to try to avoid high risks auditing.

c. The decision would have to lie in the extent of the degree of risk that the firm can take. Given that all of the information shows Edmond to be a person of integrity then the engagement can be accepted.

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