Bidding on an Audit Engagement Proposal

[vc_row][vc_column width=”1/1″][vc_tabs style=”tab-style-one”][vc_tab title=”Case” tab_id=”1424726327-1-62″][vc_column_text]Topic: Client/Engagement Acceptance

Characters: Joyce, Manager at a new audit firm

Gary, In-Charge Accountant

George and Sheila, Partners

Due to the economic downturn, George and Sheila were laid off by a larger audit firm. They established a new audit firm and were able to attract a few clients in the first year. They also hired Joyce and Gary, who had been laid off by the same firm. Joyce had been a manager for the past three years. She has been told that she can make partner if she can quickly attract new clients. Gary was a staff accountant for three years and was promoted to In-Charge Accountant this past year.

A prospective client in the construction industry contacted Joyce to bid on the company’s audit work. The client was upset over the audit fees charged by its present auditors. They were unhappy with the present auditors’ tax work and their delay in delivering a proposal on a new computerized accounting system. Joyce sees this situation as a perfect chance not only to secure a new audit client for the firm, but also to receive credit for bringing in more tax and consulting revenue.

Joyce asks Gary to prepare a draft of the bid which will be submitted to the prospective client. Gary develops the bid based on a similar client in the same industry and his assessment of the risk associated with a new client. Joyce is concerned that the bid is too high. Joyce suggests that they may be able to hire interns from a local college accounting program to use on the audit. Gary is concerned about using inexperienced staff on the audit of a new client. He also read in a recent Audit Risk Alert published in the AICPA’s CPA Letter that auditors should be alert to cash flow problems for clients in the construction industry. Gary argues that the risk of loss could be higher than normal if they do not perform a quality audit.

Joyce tells Gary not to worry or say anything to George about his concerns with the bid. She will handle any problems that come along, either with George or the client. Joyce argues that George will not complain about the lower audit fee because of the potential for the new tax and consulting work. By using lower-paid staff members and eating a little time, they could even come in at budget. Joyce also points out to Gary that once she makes partner, there will be a position open for him at the manager level. Joyce tells Gary to finish up the proposal based on her suggestions, since she needs to work on a bid for another prospective client.

Author: Dr. Lucia Peek, Associate Professor, Western Illinois University

[/vc_column_text][/vc_tab][vc_tab title=”Key teaching notes” tab_id=”1424726327-2-39″][vc_column_text]What Are the Relevant Facts?

  1. George and Sheila are partners who established a new audit firm in the past year.
  2. Joyce is a manger for the new audit firm and is anxious to attract new clients so she can make partner.
  3. The prospective client is concerned with their present auditors’ fees and is also in search of services in the tax and consulting areas.
  4. Gary, an In-Charge Accountant, prepares a draft of the budget proposal for the prospective client.
  5. Joyce thinks the bid is too high and suggests that they can use lower-paid, inexperienced staff on the audit and can also eat a little time.
  6. Gary is concerned with the legal liability aspects of the engagement since this is a first-year audit and the client is in an industry associated with high audit risk.
  7. Joyce says she will handle any problems with George, the partner on the engagement, or the client.

What Are the Ethical Issues?

  1. Do auditors have the responsibility to provide their client with a quality audit or an audit based on what the client is willing to pay? Are these at odds?
  2. Do the client’s needs take precedent over the needs of the third-party users of financial statements?
  3. Should the interns be asked to take on assignments which may be beyond their competence level?
  4. Do George and Sheila have the right to expect their audit employees to provide them with fair and truthful information on the possible costs associated with the audit?
  5. Should Gary be expected to eat time and stay within the budget constraints when he has inexperienced staff working for him?

Who Are the Primary Stakeholders?

What Are the Possible Alternatives?

  1. Gary can discuss with George his concerns about the audit bid.
  2. Gary can ask to be replaced on the audit.
  3. Gary can say nothing and go along with Joyce.

What Are the Ethics of the Alternatives?

  1. Which possible alternative would offer the greatest benefit to the greatest number?
  2. How would costs be measured in this vignette (legal liability, fees, etc.)?
  3. How much value should be placed on providing a quality audit by a client and third-party users of the client’s financial statements?
  4. Do the benefits of obtaining a new client outweigh the cost of increasing legal liability and going over budget on the engagement?
  1. What does each stakeholder have the right to expect?
  2. Does the client have the right to expect quality audits and still insist on a low audit fee?
  3. Do the interns have the right to expect to be assigned tasks they are competent to perform?
  4. Which alternatives would you want imposed on you if you were Gary? George and Sheila? Client? Third Party?
  1. Which alternative distributes the benefits and burdens most fairly among the stakeholders?
  2. Which stakeholders carry the greatest burden if Gary does nothing?
  3. Does the benefit of potential income from the prospective client outweigh the considerations of performing an audit that may not be effective due to budget constraints?

What Are the Practical Constraints?

  1. George may agree with Joyce on the use of inexperienced staff and eating time and be willing to accept the additional risk.
  2. In a tight job market, Gary may lose his job if he expresses his concerns and George agrees with Joyce.
  3. If George, the partner, agrees with Gary then Joyce may make Gary’s life miserable.

What Actions Should Be Taken?

  1. What actions should Gary take?
  2. Which alternatives would you choose if you were in his position?
  3. Why would you make that choice?
  4. Which ethical theories (utilitarian, rights, justice) make the most sense to you as they relate to this situation

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