Abernethy and Chapman
Review of Predecessor Auditor's Documentation
Client: Lakeside Company
Predecessor Auditor: King and Company
Prepared by:
Date: 10/13/2016
Prepare a list of the specific contents of the predecessor auditor's documentation that should
be examined by Abernethy and Chapman. Indicate each area that should be reviewed and
the purpose of studying these particular areas of the audit documentation. Use the following
format.
Area that Should be Reviewed
Proposed Adjusting Entries
Opening Balances in Accounts
Look Through Work Papers Regarding
Internal Controls
Understand accounting principles that
Lakeside previously used
Audit Results
Documentation of Audit Planning
Contingencies
Significant and Unusual Transactions
Purpose of Review
To determine the type and materiality
of the proposed adjustments
Ensure that the opening balances were
audited and that enough evidence was
collected
Evaluate if internal controls have any
weaknesses or if there are any areas
that do not have controls in place, as
well as strong controls that are in place
Understand how Lakeside has
consistently recorded their accounts
Understand what previous auditors
found and be wary of that information
while moving forward with the client.
For example, the “impairment of value”
from the case
Decide if the predecessor’s planning
steps of the audit were efficient or not,
and then compare their planning steps
to those of Abernethy and Chapman.
This could save time in the future while
going through the audit and make the
audit more thorough
Understand what King Company’s
thoughts and concerns of Lakeside’s
contingency plan were and use them
for further insight when Abernethy and
Chapman look into the contingency
plan
Determine if Lakeside Company has
any unique transactions that could

Analysis of Balance Sheet Accounts
affect the decision of Abernethy to take
them on as a client
Determine if King Company had any
issues with any accounts on the
balance sheet that Abernethy should
know about that could potentially affect
their audit opinion in the future
 Abernethy and Chapman
Preliminary Judgment about Materiality

Client: Lakeside Company

Balance Sheet Date: __________________
Prepared by: ________________________

Determine the preliminary judgment about materiality for the client as a whole. Express
your answer as a dollar amount. Determine the appropriate level of materiality based on
all analyses completed for the client thus far. Fully support and discuss the materiality
level that you determine.

Quantitative Considerations: Because materiality is relative, it is necessary to have

bases for establishing whether misstatements are material. A base is a critical item of
which users tend to focus while making decisions. The base will vary depending on the
nature of the client’s business. Typical bases may include net income before taxes, net
sales, total assets and stockholders’ equity. Percentages typically range from 1%-10%
depending on the base.

Base (from Dollar Amount of Percentage Range Base x Percentage

previous year) Base
Income before tax 448,000 10% 44,800
Assets 3,186,000 1% 31,860
Stockholders’ 814,000 1% 8,140
equity

Qualitative Considerations: Certain types of misstatements are likely to be more

important to users than others, even if the dollar amounts are the same. For example,
misstatements that involve fraud may be more important to users than misstatements
due to unintentional errors. Fraud reflects on the integrity of management and other
employees of the client.

Item to be Considered Impact on Materiality (Increase or

Decrease)
Sales Increased
Inventory Increased

Preliminary Judgment about Materiality: Combine the quantitative and qualitative

considerations into one overall materiality level.

Materiality level: $ 84,800

Discussion: Discuss how you arrived at this dollar amount for the preliminary judgment
about materiality. That is, how did you combine the qualitative and quantitative
considerations to arrive at this dollar amount?
Based on three important bases: income before tax, assets and stockholders’ equity.
Because when looking at the financial statements, there are a lot of inappropriate
increase (such as inventory store 3 or sales in store 3).