Case 5-3: Reauditing Financial Statements
Margaret Dairy is a CPA and the managing partner of Dairy and Cheese, a regional CPA firm located in
northwest Wisconsin. She just left a meeting with a well-respected regional credit union headquartered
in her hometown. Margaret was asked whether her firm would be willing to reaudit the previous years’
financial statements and, subsequently, conduct an audit of the current years’ financials. This is the first
time Margaret has been asked to conduct a reaudit, although she realizes it has become more common
as a result of problems like Enron and WorldCom experienced. Some companies switching auditors have
elected to have the new audit firm re-examine prior-period financial statements because of concerns
about the quality of the earlier audit.
On her way back to the office, Margaret calls her brother Mark, who is a Senior Audit Manager at a firm
in Margaret’s hometown, to share her good news. She tells him that doing the audit work for the two
years will increase her firm’s revenue by 10%. Mark is taken aback by the news. The new client was a
client of Mark’s firm. He did not know the firm had lost the client and it might be picked up by Dairy &
Cheese.
Read the case (above). Choose one of the individuals in the case and identify their
actions and viewpoints. Write a 5-7 page executive summary on the case, including
answers to the following questions.
Questions
1. What issues should be of concern to Margaret in deciding whether Dairy and Cheese should
accept the reaudit engagement?
2. What are Mark’s ethical obligations in this matter? Should he discuss the situation with
Margaret? How about bringing it up at his firm?
3. Regardless of your answer to part 2, what inquiries should Margaret make of the predecessor
auditor?
4. Assume Margaret’s firm discovers undetected fraud in the previous years’ financial statements,
what should she do?
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Reauditing Financial Statements (Case 5-3)
Margaret Dairy is a CPA and the managing partner of Dairy & Cheese, a regional CPA business based in Charlotte, North Carolina.
Wisconsin’s northwest corner. She had just finished a meeting with a well-known regional credit union.
in the town of her birth Margaret was asked if her company would be willing to re-audit the prior years’ financial statements.
financial statements, and then undertake a financial audit of the current year’s financials. This is the first of many.
time Margaret has been asked to do a reaudit, despite the fact that she is aware that this is becoming increasingly prevalent.
as a result of problems like those experienced by Enron and WorldCom. Some companies switching auditors have
elected to have the new audit firm re-examine prior-period financial statements because of concerns
about the quality of the earlier audit.
On
