A complaint has been filed with the provincial institute against a sole practitioner, AM. Your firm has been asked to perform a peer review.

AM works in a small town which is a bit isolated. Most of his work is compilation and review, as well as tax preparation. He has a few audit clients, including Evergreen Motors, a large regional car dealership. The bank holding Evergreen’s debt filed the complaint when Evergreen went into bankruptcy. At that time it found that its general security on the fixed assets of Evergreen was not sufficient to cover its loan.

You meet with AM and begin reviewing the working papers. They appear to be in relatively good shape, although the page references are all numbers, not the usual combination of numbers and letters. Also, the administrative files are lacking time budgets, which AM explains away as “Well, it’s just me to do everything anyway.”

Otherwise, there is a new engagement letter for the last year of audit. There are also notes from a planning meeting discussing the current year’s audit. These reveal that AM is concerned about the poor results of the current year. However, the overall strategy appears to have been photocopied from a prior year.

The audit evidence files are in balance sheet order. The year end was noted as July 31, 20_3 on most, but not all working papers. The evidence papers have also not been initialed and many are missing dates. Again, AM smiles and says, “It’s just me.” Importantly, the dates are on all of the papers related to the inventory count which was performed by AM over two days at the main car lot, and a secondary lot used for extra storage.

Moving to the fixed asset files, which begin at page 81 and end at page 86, you see that the testing primarily consisted of the completing the carry-forward schedules and testing of the additions. The carry-forward schedule includes a mathematical check on the amortization calculation. Testing additions involved inspecting the purchase documents and then checking that they physically exist.

One of the questions on the detailed program was “Enquire if any assets have been sold in the year.” The management response was entered as “no” but there was no date beside it. This is important to the bank because the second lot had been sold and was being leased back by Evergreen from the new owner. Even though the land value of the main lot exceeded the purchase value of both parcels when they were acquired thirty years ago, the bank complained that AM should have adjusted the books for the sale.

Required Work:

1. Please complete your review of AM’s files.

2. What GAAS were (or should have been) considered by AM when accepting and performing the audit?  

3. What would you as a successor auditor consider if the engagement were offered to you?