You are Dan James, a professional accountant working in london Ontario. After many years as a full time Public Accountant first with the local office of a large international firm, and then in your own fulltime practice, you joined the havard School of Business to instruct various courses in accounting, auditing, taxation and accounting systems. Since joining havard, you have continued the operation of a private part time accounting and consulting practice as a sole practitioner.

Several weeks ago, you received a phone call from the owner of a long time business client.

“Robby – I have a friend, Bill Smith, who really needs your help. He is looking for financing to purchase some equipment to expand his manufacturing business and to pay off a few creditors. He has approached his bank about a loan but the bank manager indicated that he would need financial statements prepared with an assurance report. His current accountant is no longer licensed to perform assurance engagements so my friend is looking to hire a new accountant and obviously I thought of you”.

The potential new client is a mould and die manufacturing business in Oldcastle just outside of Windsor. In your initial telephone conversation with Bill Smith, he indicated that this year’s sales will be about two million dollars. Most of his company’s current work is as a sub contractor to larger manufacturing businesses which build moulds and dies for the major North American auto companies. The company has a calendar year end of December 31. The company currently has seven full time employees including Mr. Smith, a bookkeeper/office clerk and five mould and die makers.

Today is December 20, 2020 and you are returning to your office after meeting with Bill Smith to discuss his needs. When you walked into the door of his plant, you recognise Mr. Smith as someone you have met before. It turns out that his wife’s sister is married to your wife’s brother and you have met at a family gathering at some point in the past.

In the meeting, Bill Smith outlined his needs and provided some more information which you have written down as follows:

-the company’s name is Bill Smith Mould and Die Co., and he is the only shareholder.

-he figures that he needs to borrow about $ 350,000 to buy a bigger used milling machine need to work on larger jobs, at a cost of about $ 275,000 and also to pay off some past due unremitted payroll and sales taxes owing to the tax authorities. There is some considerable urgency to get the loan as the machine he has been looking at may be sold to someone else and the taxauthorities are demanding payment. Bill Smith wants the loan completed by the end of January 2021.

-the company’s bank account is currently at its maximum overdraft – it currently has no cash available other than to pay payroll expenses.

- his bank won’t even consider a loan until he provides properly prepared complete financial statements for the year ending December 31, 2020 with some form of assurance report attached.

-his current external accountant, Bob Jones, is nearing retirement and no longer does assurance engagements so Bill Smith sees the need to change accountants. Mr. Smith indicated that this was probably a good idea for a number of reasons -one of those being the errors made by Jones that were found in a recent income tax audit regarding the accounting and tax accounting for research and development tax credits. His company had to repay some tax and also penalties and interest for credits claimed that it was not entitled to. As he was telling you this, you remembered your own prior experience with R&D tax credits – the claims often need the assistance of a technical consultant and are often subject to considerable interpretation. All are eventually audited by the tax authorities. About ten years before, you had resigned from an engagement with a manufacturing client over disagreement as to the proper claiming of R&D credits and had promised to yourself that you would try to avoid similar problems in the future. Whileyou are not up to date with the tax rules for these credits, you had heard that the rules had become even more complex in the intervening years.

-the company will have relatively little inventory on hand at the yearend.

-currently accounts receivable total about $ 1,000,000 as at November 30, 2020. The major components are:

-January 31, 2020 invoice for development work billed to a client but currently in dispute - $ 847,500.

-loan to Bill Smith in October 2020 used by him to purchase a new rally race car - $ 75,000.

-the remainder of the total accounts receivable are invoices for work done in October and November 2020 – all of which Bill Smith says are fully collectable.

-the accounting work is currently performed as follows:

-his bookkeeper employee does all the paperwork and records in journals the cash entries throughout the month for sales, purchases, payroll, cash receipts and cash disbursements.

-at the end of the month the journals and supporting paperwork go to Bob Jones who records the journals in the company’s general ledger, makes the required month end adjusting entries, and prepares monthly income statements and balance sheets. Bob Jones keeps the company’s general ledger at his office.

-Bill Smith wants you to continue with the same system with you taking over the monthly general ledger accounting work from Bob Jones. He doesn’t think that his current bookkeeper is capable of doing any of the monthly work and he also wants to keep theinformation in the general ledger and statements confidential. Smith says he doesn’t have any time to become more involved with the monthly accounting and also really doesn’t fully understand some of the accounting requirements – he leaves that up to his accountant.

-he also indicated that he will want you to take the lead in negotiating the new bank loan as he doesn’t really like his current bank manager and is too busy to become involved with the loan negotiations.

-the company rents its plant facilities at a cost of $ 6,000 per month and the landlord is currently owed for two months rent not paid – for November and December 2020.

-all other operating assets are either leased or have been bought with secured loans.

As you drive back to your office, you think about the things that you need to consider in deciding whether you can and want to accept this possible engagement.

You recently attended a seminar on professional ethics and some of the things discussed there seem to be considerations.

Required:

1.Identify and list the various professional ethics and legal issues relevant to this potential new client which need to be considered by Robert James.

2. Document your decision to accept or to not accept the engagement with reasons.

Answer rating: 100% (QA)

1 Professional Ethics and Legal Issues Informed Consent Robert must ensure that the client is aware of the scope of his services and provide a written ... View the full answer