AUDIT CASE Essays

Submitted By 0005yud
Words: 819
Pages: 4

Brief Recap of Facts
The engagement team is auditing Fresh Falls Water Purifiers, Inc; an SEC registered firm. The controller has refused to sign the management letter of representation on the basis that there is a water shortage due to a lack of rain and below average snowfalls last year. The controller is also concerned with the effects that water shortage could have on the sale of water purifies. The controller believes there needs to be an additional 10% added to the valuation allowance, which is considered material. The CEO and CFO, on the other hand, believe that the valuation is adequate if not excessive. Although the engagement team also believes that the valuation is adequate, the controller’s expertise is important and firm policies require the controller to sign the representation letter.

Most Important Issue
The controller of Fresh Falls Water Purifiers, Inc. has refused to sign the management representation letter. Firm policy requires that the controller sign the management representation letter and refusal may, according to AU § 333.13, place a limitation on the scope of the audit.

Alternative Decision
1. The auditors may disclaim the opinion as a result of the controller’s refusal to sign the management representation letter
2. The auditors may issue a qualified opinion.
3. The auditors may withdraw from the engagement.

Analysis of Alternatives
1. If the auditor feels that there is a limitation on the scope of the engagement as a result of the controller’s refusal to sign the management representation letter, a disclaimer of opinion may be issued. This alternative suggests that the engagement team was unable to obtain sufficient appropriate evidence to support the audit. In this case, there may be an issue with reliance on the evidence since the controller has refused to sign the letter. According to AU 580, parties who are responsible for the preparation and fair presentation of the financial statement should also provide written representation. Although the controller is not required to have written representation to be in accordance with the Generally Accepted Auditing Standards, we feel the controller plays a significant role in the compilation of the financial statements and specifically the presentation of the financial statements for Fresh Falls Water Purification, Inc. Furthermore, it is a firm requirement for the controller to sign the management representation letter for every engagement. A disclaimer of opinion may be an adequate alternative for the firm if the audit team does not feel comfortable relying solely on the Chief Executive Officer and the Chief Financial Officer’s written representations.
2. The next alternative is for the auditors to issue a qualified opinion. This alternative may be used if we believe Fresh Falls Water Purifiers, Inc. has maintained GAAP principles with the exception of a refusal to have written management representation. In the report, the auditors need to specify the controller’s refusal to sign the representation letter as this places a limitation on the scope of the engagement. Management representation cannot be fully relied on since the controller refuses to sign the representation letter. There is clear disagreement between the controller and management over accounting methods and this leads us to believe that other issues may exist that impact the financial statements. We would need to disclose…