Johanna M.

Dagoy
AUD411 Summer 2014 2:00-5:00

Principles of Auditing 12
th
edition
Whittington & Pany page 204
Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently
appointed to the board of directors of a local civic organization. The chairman of the board of the civic
organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra
Corporation.
Potter was quite excited when Edmond indicated that his corporation needed an audit, and he
wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation
needed the audit to obtain a substantial amount of additional financing to acquire another company.
Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the
engagement should be substantial.
Since Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that
Tower & Tower wanted to do the work. Potter then mentions that Tower & Towers quality control
policies require an investigation of new clients and approval by the managing partner, Lee Tower.
Potter obtained the authorization of Edmond to make the necessary inquiries for the new client
investigation. Edmond was found to be a highly respected member of the community. Also, Tierra
Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the
corporation reflected nothing negative.
As a final part of the investigation process, Potter contacted Edmonds former tax accountant,
Bill Turner. Potter was surprised to discover that Turner did not share the others high opinion of
Edmond. Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of
a large capital loss reported on the sale of a tract of land to a trust. Edmond told the IRS agent that he
had lost all of the supporting documentation for the transaction, and that he had no way of finding out
the names of the principals of the trust. A search by an IRS auditor revealed that the land was recorded
in the name of Edmonds married daughter and that Edmond himself was listed as the trustee. The IRS
disallowed the loss and Edmond was assessed a civil fraud penalty. Potter was concerned about these
findings, but eventually concluded that Edmond had probably matured to a point where he would not
engage in such activities.



CASE ANALYSIS
STATEMENT OF THE PROBLEM
Should Lee Tower accept the new client engagement?
AREAS OF CONSIDERATION
Potter obtained the authorization of Edmond to make the necessary inquiries for the new client
investigation.
Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently
appointed to the board of directors of a local civic organization. The chairman of the board of
the civic organization is Lewis Edmond, who is also the owner of a real estate development firm,
Tierra Corporation.
Edmond was found to be a highly respected member of the community
Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet
report on the corporation reflected nothing negative.
Bill Turner, former tax accountant, did not share the others high opinion of Edmond.
Turner related that on an IRS audit 10 years ago, Edmond was questioned about the details of a
large capital loss reported on the sale of a tract of land to a trust.
Edmond told the IRS agent that he had lost all of the supporting documentation for the
transaction, and that he had no way of finding out the names of the principals of the trust.
A search by an IRS auditor revealed that the land was recorded in the name of Edmonds
married daughter and that Edmond himself was listed as the trustee.
The IRS disallowed the loss and Edmond was assessed a civil fraud penalty.
ANALYSIS/ AREAS OF CONSIDERATION
Lee Tower would accept the new client engagement. Provided, that Potter would investigate
more on the fraud.
Lee Tower may accept the engagement because of the evidence that Edmond is highly
respected in their community and that their banker and attorney has high regard for him. If Lee
tower would accept the engagement then they would have a great income since Tierra
Corporation is growing. Lee could base his acceptance of the clients based on the good
reputation of Edmond. Since Edmond is cooperative and is willing to be investigated, it would
show that he has nothing to keep and that he was doing what is right.
Lee Tower would not accept the new client engagement.
Lee Tower would not accept the new client engagement because of the committed
fraud 10 years ago. It might have happened years ago but the fraud committed must still be
taken into consideration since the engagement is a substantial one. Edmonds maturity cannot
be proven by someone based on how he acts on the outside because the way he committed the
fraud was intentional and it was obvious that he knows what really happened but he hide it
from the authority. He even dared to say that he had lost all details of the sale of the land.
Lee Tower would not accept the engagement because Tammy Potter was recently
appointed to the board of directors of a local civic organization and that the chairman of that
organization is Lewis Edmond, who is also the owner of the prospective client, the Tierra
Corporation. This might result to intimidation threat from Edmond to Potter since Edmond has a
higher rank than Potter. This would also create self-interest threat that is so significant that no
safeguards could reduce the threats to an acceptable level. The best thing to do is not to accept
the engagement.
RECOMMENDATION
Lee Tower must not accept or approve the new client engagement because Tammy Potter is
appointed to the board of directors of a local civic organization and that the chairman of that
organization is Lewis Edmond, who is also the owner of the prospective client, the Tierra Corporation.
The threats created because of this, were so significant that no safeguards could reduce the threats to
an acceptable level but to not accept or approve the engagement. If Lee Tower would accept the
engagement, it would only create a risk in the firms name. It is also not an assurance that even if
Edmond had a good reputation in his communities and in bank and its attorney that he would not create
a fraud. Knowing that he has a high position in the board, he could easily change or alter the details of
the audit. He also has the power to intimidate the auditors because of his position. It would be best if
Lee Tower would not accept the engagement.