Abernethy and Chapman

ANALYSIS OF POTENTIAL LEGAL LIABILITY

Potential Client:
Type of Engagement:
Form Completed By:
Date:
(1)

Is the potential client privately held or publicly held?

Privately-held

(2)

Evaluate the possible liability to the client that Abernethy and Chapman
might incur, if the engagement is accepted.
The basic liability to the client for losses occurring as a result of any
negligence. If Abernethy Chapman performance engagement as an
average, precedent auditor would, no problem exist. If not the client may
sue for return of its audit fee as well as any other resulting losses. A special
problem area exists in the Lakeside Case: Clients weak internal control. It
may increase risk of fraud or embezzlement. The control problems also
make discovery of such defalcations more difficult. In addition, proving that
the firm is innocent of negligence is often difficult to do if the client loses
money through defalcations not discovered by auditor.

(3)

List the third parties that presently have a financial association with the
potential client and could be expected to see the financial statements. These
parties are also called primary and foreseen beneficiaries.
Current stockholder, Cypress products, 2 bank financing the inventory, Other
Creditors.

(4)

Discuss the possibility that other third parties will be brought into a position
where they would be expected to see the financial statements of the
potential client. These parties are also called foreseeable beneficiaries.
As Rogers has expressed considerable interest in expansion, the CPA firm
should anticipate that the financial statements could be presented to
potential stockholders or lenders.

(5)

Evaluate the possible legal liability to third parties, both present and
potential, that Abernethy and Chapman might incur if the engagement is
accepted.

Abernethy and Chapman

INFORMATION FROM PREDECESSOR AUDITOR
Potential Client:
Form Completed By:
Predecessor Auditor:
Date of Interview:
(1)

Discuss the predecessor auditor's evaluation of the integrity of the

management of the potential client.
The predecessors evaluation regarding the Lakeside Company did not
indicate any problem.
(2)

Did the predecessor auditor reveal any disagreements with management as

to accounting principles, auditing procedures, or other similarly significant
matters? If so, fully describe these disagreements.
A major problem between Lakeside and predecessor involved the
explanatory paragraph included in the 2014 report. The uncertainty issue
revolved around the potential loss foreseen in the possible closing of
lakeside 6th store.

(3)

What was the predecessor auditor's understanding as to the reasons for the
change in auditors?
The Predecessor stated that the form was discharged due to the above
stated opinion.
(4)

Did the predecessor auditor give any indication of other significant audit
problems associated with the potential client?
The predecessor also mentioned weakness in Lakeside and Internal Control
and Rogers unwillingness to improve these system.
(5)

Did the predecessor auditor indicate any problem in allowing Abernethy and
Chapman to review prior years' audit documentation for the potential client?
If "yes," explain.
The predecessor stated that the auditor documents could be revived.

(6)

Was the predecessor auditor's response limited in any way?

Not that I can say of. In my opinion it indicated none and just openness.