Don Kim is a partner with a small firm which offers accountingand assurance services....

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Accounting

Don Kim is a partner with a small firm which offers accountingand assurance services. He receives a call one day from Jane Small,his sister-in-law to ask if he would help out with a difficultsituation. She explains that she has financial interests in acompany called Intuition Ltd, and has been asked to contact him, astheir previous auditor has resigned. The company needs an auditperformed urgently to comply with various contractual andregulatory requirements and she is concerned that her money will beat risk if the audit is not completed within a month. She alsoconfides that she is becoming increasingly concerned about thehonesty and ethics of the directors. Don Kim impulsively acceptsthe audit engagement out of concern for Jane and promises to getstarted as soon as possible.
He soon regrets his impulsivity when he realises he hasover-committed his small firm as all audit staff are already fairlyheavily committed. He also realises that Intuition Ltd is a largerand more complex company than expected, with sophisticatedcomputerised systems none of his staff have worked on before.Initial discussions with the managing director of Intuition Ltdreveal that he has little understanding of auditors’responsibilities and is expecting significant assistance inaddition to what is part of normal audit responsibilities.
2016
2017
Current ratio
2.2 : 1
0.4 : 1
Debt to Equity ratio
0.5 : 1
1.4 : 1
Accounts Receivable Turnover
26 days
80 days
Required: (Please read all three parts i.e., (a) –(c) below before starting your answer)
a) Briefly explain any four issuespresent in the scenario above that should have been identified andconsidered by Don Kim through proper client acceptance proceduresbefore he accepted and commenced the audit of Intuition Ltd;
b) Proper client acceptance procedures requirecommunication with the previous auditor prior to accepting a newaudit engagement. Briefly explain whysuch communication is required as well as the necessarysteps which Don Kim should have worked through toproperly communicate with the previous auditor;
c) Briefly explain how and why theinformation from the analytical procedures will impact on theplanning of the audit;

Answer & Explanation Solved by verified expert

3.6 Ratings (509 Votes)

A The following are the proper client acceptance procedures before he accepted and commenced the audit of Intuition Ltd 1 Management Integrity The management environment can create business and audit risks that should be squarely addressed The independent auditor for example examines financial statements that are based upon assertions of management ranging from the existence of an element in the financial statements to disclosures of information regarding that element No responsible practitioner would knowingly place reliance on assertions of a clients management which had questionable integrity 2 Relationships with Other Professionals An Auditor communicate with the predecessor auditor prior to committing to provide audit services to a new client Matters of interest include the opinions issued by the predecessor auditor resignation of the prior auditor or the refusal to stand for reelection disagreements between the See Answer

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Transcribed Image Text

In: AccountingDon Kim is a partner with a small firm which offers accountingand assurance services. He...Don Kim is a partner with a small firm which offers accountingand assurance services. He receives a call one day from Jane Small,his sister-in-law to ask if he would help out with a difficultsituation. She explains that she has financial interests in acompany called Intuition Ltd, and has been asked to contact him, astheir previous auditor has resigned. The company needs an auditperformed urgently to comply with various contractual andregulatory requirements and she is concerned that her money will beat risk if the audit is not completed within a month. She alsoconfides that she is becoming increasingly concerned about thehonesty and ethics of the directors. Don Kim impulsively acceptsthe audit engagement out of concern for Jane and promises to getstarted as soon as possible.He soon regrets his impulsivity when he realises he hasover-committed his small firm as all audit staff are already fairlyheavily committed. He also realises that Intuition Ltd is a largerand more complex company than expected, with sophisticatedcomputerised systems none of his staff have worked on before.Initial discussions with the managing director of Intuition Ltdreveal that he has little understanding of auditors’responsibilities and is expecting significant assistance inaddition to what is part of normal audit responsibilities.20162017Current ratio2.2 : 10.4 : 1Debt to Equity ratio0.5 : 11.4 : 1Accounts Receivable Turnover26 days80 daysRequired: (Please read all three parts i.e., (a) –(c) below before starting your answer)a) Briefly explain any four issuespresent in the scenario above that should have been identified andconsidered by Don Kim through proper client acceptance proceduresbefore he accepted and commenced the audit of Intuition Ltd;b) Proper client acceptance procedures requirecommunication with the previous auditor prior to accepting a newaudit engagement. Briefly explain whysuch communication is required as well as the necessarysteps which Don Kim should have worked through toproperly communicate with the previous auditor; c) Briefly explain how and why theinformation from the analytical procedures will impact on theplanning of the audit;