Questions

1. Why is it important to do the kind of due diligence testing and risk assessment review conducted by Cardinal & Coyote prior to determining whether to make a bid for the audit of a potential client? What are the potential red flags with respect to the Jost audit? If you were Yancy Corliss, would you go ahead and recommend to Sharon Rules that the firm should submit a bid for the Jost audit? Why or why not?

2. Regardless of your answer to question 1, assume Corliss decides to recommend to Rules that the firm should make a bid for the Jost Furniture audit. Beaudean seems surprised and asks what other factors Corliss might have considered in making the decision. Corliss is quite blunt and says: "I am a new partner in the firm. I have to bring in new business. This client is a slam dunk. If we make a reasonably competitive bid, we will get the account."

o a. Why do you think there is so much pressure in public accounting to bring in new clients? Is this a good thing or are there potential risks that might go unnoticed or ignored? How might the decision by Corliss present an impediment to making sound audit decisions later on?

o b. Some CPA firms have started to add indemnification clauses to their engagement letters that state the firm is not responsible for fraud when the client knowingly misrepresented financial information during the course of gathering evidence and testing account balances. Do you think these clauses are ethical? Why or why not?

3. Typically, when there is a going-concern issue with a client, the CPA firm issues an unqualified opinion with an explanatory paragraph. Given the limited facts of the case, do you believe this type of opinion is justified? Do you think the firm should consider issuing a qualified opinion or disclaim an opinion? Why or why not? How about withdrawal from the engagement?