Ellis & Jarrick, CPAs, received a RFP from the audit committee of the board of directors of Lunar Mills, Inc. to perform an audit of the company’s financial statements for the year ended December 31, 2009. In connection with its client acceptance procedures, Ellis & Jarrick requested permission to meet with Lunar Mills’ former auditors, Percy & Brice, LLP. Management and the board of directors of Lunar Mills refused to authorize such a meeting, saying that it would be a waste of time. They further explained that their relationship with Percy & Brice had deteriorated significantly as a result of disagreements pertaining to their separation. They noted that the company and the former CPA firm ultimately agreed to “go their separate ways.” The company believed that its former auditors were harboring feelings of ill will and would provide derogatory information if called upon by Ellis & Jarrick.

a. What information should be obtained by an auditor during its inquiry of a predecessor auditor prior to accepting an audit engagement?
b. How does the communication between predecessor and successor auditor impact the successor auditor’s risk assessment?
c. What are the ethical implications of Lunar Mills’ refusal to authorize the meeting between auditors? How should Ellis & Jarrick respond to this situation?

  • CreatedJanuary 21, 2015
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