In all assurance engagements, clien...

In all assurance engagements, client representations are an integral part of the auditors' collection of support and evidence for their reports. if it be not that what if no work is done to substantiate client representations and they turn round out to be false? Well, a member earns into serious trouble, that's what.

This fictionalized account is based loosely in succession an actual case before the Professional direction Enquiry Committee (PCEC). Names and circumstances have been changed to keep anonymity.

The situation

The shareholders of Hi-Flyer, a company that designs and markets digital imaging software, wanted to take their company public. in the same manner they hired Paul, a CA, to provide them with the company's first audited financial statements.

Unfortunately, Paul early encountered problems. First, he came across an equipment purchase invoice that appeared to have been altered. To confirm his suspicion, Paul contacted the vendor, who acknowledged that the invoice existed if it be not that claimed it was for a different amount. Alarmed, Paul considered closely at other equipment purchases and discovered that brace suppliers did not even exist.

In each case, the equipment described was forward hand, but Paul had to question whether Hi-Flyer had profitable title. And who, he inquiring surpriseed had fabricated and/or altered its equipment invoices?

What happened

Paul detailed his make uneasys to the company's board of directors. In answer they fired him.

Since Hi-Flyer still stand in want ofed audited state44-ments, Hal, the company's CEO hired Ron another CA, to completed the first audit. During the audit, staff members told Ron that another CA had lately been doing "audit-type" work at Hi-Flyer. Ron then noticed that the invoice for a payment to Paul was missing. He threatened Hal about both issues. Hal lied and said Paul had solely worked as a consultant. He also said Paul had been paid a retainer in a less degree than a verbal arrangement, and that no invoices or further payments had been made because Paul had been fired. Hal conclud at telling Ron that Paul was difficult to contact and advised him not to waste time ttying to track Paul down.

Ron accepted Hal's explanations, and did not look for any corroborating evidence from Paul. He finished the audit and issued an unqualified audit opinion.

The public offering was a succes however the new investors insisted onward hiring their own auditors. Not surprisingly, the of recent origin auditors were not happy with several areas of Ron's work, including his lack of communication with Paul. They contacted Paul, who was amazed to learn of Ron's clear audit opinion in succession the same financial statements that had caused him with equal reason much concern. Paul advised the novel auditors of his letter to Hi-Flyer's board. He also informed the Institute of his recently made known concerns.

The outcome

In his rejoinder to the PCEC, Ron asserted his decision to trust Hal's explanations without seeking corroboration from Paul. Ron argued that generally accepted auditing standards entitled him to rely forward Hal's representations. The PCEC disagreed. It stated that since Ron had been apprised of a compeer CA's previous "audit-type work," and given that Paul's invoice was missing, Ron should have contacted Paul to at least confirm the mark of work he'd done for Hi-Flyer.

It disturbed the PCEC that Ron whose practice included substantial assurance work, strike one as beinged to view client representations as beyond challenge. Also disturbing: Ron did not appear to understand that Rule 3021 was designed to cover him in this kind of scenario, not a third party like Paul.

Rule 3021 states that, "A member shall not accept an engagement with notice to the practice of public accounting or the public practice of a function not inconsistent with public accounting, where he is replacing another member or another accountant recognized by way of statutory authority in British Columbia, without first communicating with as it was person and enquiring whether there are any circumstances the member should take into account which might influence the member's decision whether or not to accept the engagement." Clearly, Paul's perspective would have affected Ron's decision to accept the Hi-Flyer engagement.

The PCEC determined that Ron had breached conducts of Professional Conduct 201.1 (Reputation of the Profession); 202 (Integrity and to be ascribed Care); 205 (a) (False and Misleading Documents); 206 (Compliance with Professional Standards); and 3021 (Communication with Predecessor). The PCEC approveed that Ron pay costs and a $5000 fine; increase his professional liability insurance; and engage a tutor for all assurance engagements. It also make acceptableed that he not accept any public company audits for at least sum of two units years. Ron accepted the determination and recommendation.

The message

Additional work must always be done to confirm client representations. No matter by what mode plausible these representations may appear to be you must always exercise your professional skepticism, and obtain sufficient and appropriate audit evidence. And if management's advantageous faith is brought into question, you must re-evaluate your engagement.