Katrina Lukacs is the engagement partner of the audit of Champion Securities, an investment company. Most of Champion's assets and liabilities are financial and their valuation is critical to the assessment of the company's solvency and profitability. Katrina has employed two outside experts to value the financial assets and liabilities because they are extremely complex to value, particularly the energy market derivatives and the instruments traded in foreign markets. In addition, the valuations are highly dependent on market conditions and the specific and detailed requirements of the recently revised accounting standards.
Throughout this year's audit, Katrina has had difficulties with the CEO of Champion Securities. He is vehemently opposed to any asset write downs she has suggested. The CEO has the backing of the chairman of the board and Katrina has been unable to get the CEO to listen to her concerns about the valuations of the financial assets and liabilities the company has made. In past years, Katrina has had an amicable relationship with both the CEO and the chairman and the audits have run very smoothly. Katrina has now realized that this harmonious relationship was mainly due to the boom in the market. It was unlikely that there would be arguments about writing up the value of the company's assets during these good times.
Katrina, with the help of the experts, has prepared a summary of the relevant items, detailing the revised values for the assets and liabilities and the associated effects on income and retained earnings. The CEO has dismissed this summary and the audit recommendations with the comment, "The market has hit the bottom and is recovering. There is no need to show these write downs because by the time the financial statements are published the values will be back to where they were before the market fell. It is all a waste of time. In fact, I think you are just being difficult to deal with. I think we need an auditor who is a bit more realistic."
Required
(a) Discuss the ethical issues Katrina faces and explain what she needs to do to comply with the code of professional conduct independence requirements.
(b) Explain Katrina's audit report options.
(c) Recommend a course of action for Katrina.