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ACC557
Outline for Seminar #2
Objectives
By the end of this seminar students should be able to explain:
What are the auditor independence rules for public and private companies?
Reading
1. Class questions and student presentation (see this Seminar outline).***
2. Audit quality and executive officers affiliations with CPA firms, C. Lennox, Journal
of Accounting and Economics, 2005, Vol. 39, No. 2: 201-231. This article is
helpful for answering Q2 below.***
3. Tax account misstatements and the PCAOBs restrictions on auditors tax
services. C. Lennox, Working paper, 2015, University of Southern California. This
article is helpful for answering Q3 below.***
4. AU 220: Independence.**
5. Chapter 4, Auditing and Assurance Services, Arens, Elder and Beasley.**
6. AICPA Code of Professional Conduct.*
7. AU Section 315. Communications between predecessor and successor auditors.
http://pcaobus.org/Standards/Auditing/Pages/AU315.aspx.
This
standard
is
related to the student presentation.
8. Do companies successfully engage in opinion-shopping? The UK experience, C.
Lennox, Journal of Accounting and Economics, 2000, Vol. 29, No. 1: 321-337. This
article is related to the student presentation.
Lennox, and L. Mauler), Contemporary Accounting Research, 2015, Vol. 32, 575607. This article is related to the student presentation.
***: Required reading
**: Recommended reading
*: Optional reading
: Recommended reading for the presenters and optional for everyone else
In light of the AICPA Code of Professional Conduct can you accept the
companys request to prepare the quarterly statements?
Assume you accept and the bank later requires annual audited financial
statements. The company realizes you might be unwilling to accept the
engagement if you are paid in shares so it is willing to pay your audit fee in
cash. Should you accept the engagement?
Patrick Byrne and Jonathan Johnson went back on their promise that they would not
shop for an audit opinion. Both Byrne and Johnson previously told investors that
Overstock.com would wait until after the SEC Division of Corporation Finance
completed its review of the company's financial disclosures. See quotes from
transcript below:
While Adrienne Gonzalez, another widely read accounting blogger, was even
more blunt in her criticism of KPMG:
Scepticism sits low on FDs' audit priorities, Kevin Reed; 27 February 2013; Accountancy
Age
SCEPTICISM SITS low down the list of finance directors' priorities when assessing the quality
of their auditors. A survey of 188 finance directors by Accountancy Age's sister title Financial
Director found that auditor scepticism ranked nine of 11 key traits when assessing their
importance in gauging audit quality, scoring an average of 2.5 out of four. Degree of challenge'
was ranked seven of the 11. Top of the pile was efficiency of audit process, scoring 3.7 out of 4.
Other key traits included the reliability of the audit report; sector and business knowledge;
communication skills; and the ability to spot misstatements.
The future structure of the audit market, and the services provided by its participants, is very
much up for debate. The Competition Commission said last week that auditors were focused on
the interests of management above shareholders. The European Commission is also set to report
on its findings into the audit market. Financial Director's survey included 92 interviews with FDs
of companies audited by the top six UK accountancy firms. FDs of 17 listed companies were
interviewed, alongside 171 non-listed FDs. Kevin Reed, editor of Accountancy Age and
Financial Director, said: "While FDs of non-listed companies are more likely to use auditors as
close-at-hand business advisers than for public interest entities, it is still worrying that auditors'
scepticism and challenge rank below process efficiency when they assess audit quality.
"Investors in large listed businesses need to play a more active role in their companies' audit
process. I hope that investors, or owners, of non-listed businesses are getting the most out of
their auditors."
Suggested questions
1. The Sarbanes-Oxley Act (2002) requires audit committees to take
responsibility for appointing and changing audit firms. Why was this
requirement introduced? Do you think management still have
opportunities to engage in opinion-shopping even after SOX?
2. What information must a company disclose in its 8-K filing when it
changes auditor? What is the likely impact of this disclosure requirement
on opinion-shopping?