Problem
A. Why would the owner of Lakeside as well as the company's banks require that an independent CPA firm perform an annual audit?
B. This case implies that no audit with the firm of Abernethy and Chapman has an in-depth understanding of the consumer electronics industry. Is a CPA firm allowed to accept an engagement without having established the necessary expertise to oversee the audit? Would the knowledge required to audit a consumer electronics company differ significantly from that needed in the examination of a car dealership? Does the auditor have an obligation to discuss his lack of experience, or his plans to obtain the expertise with the client?
C. Auditors must assess the possibility of fraud risk factors. Fraud risk factors are events or situations that would indicate an increased possibility that fraud has occurred. Lakeside has recently created a profit-sharing bonus plan. Why might such an incentive be a special concern to an audit?
D. Rogers wants Abernethy and Chapman to assist his company in developing a new accounting system. Does a CPA firm face an independence problem in auditing the output of systems that the same firm designed and installed? Does your answer depend on if the client is publicly traded or not? How so?
E. After the discussion at the CPA firm, Andrews was assigned to visit the headquarters/warehouse of Lakeside to tour the facility. What should Andrews observe, and what factors should he be especially aware of during his visit?
F. Is there any reason why Lakeside might not want to hire a CPA firm that has other clients in the electronic industry?