Mha Case Study
Strategy 1 – Sit down with Susan and determine the closing costs for NYHs decorative pillow facility, given the FAS 146 requirements
Spending time with Susan to determine the closing costs for the NYH facility will increase client satisfaction, and timeliness of the audit, however this will compromise auditor objectivity and fails to guard against independence threats.

If the engagement team determines the closing costs for the facility, this should address Susan’s concerns regarding the tight deadline, and will also preserve her value as an employee of MHA. As a result, she is likely to speak highly of the audit firm to corporate headquarters which should ensure additional work flow from the client, not to mention the additional billing hours that can be charged to the client. Furthermore, the engagement team should have the technical knowledge to complete this accounting task with competence, which is important considering Susan is not a CPA despite her undergraduate accounting degree. This will also create segregation of duties between financial accounting and reporting functions, as Susan is already tied up with other accounting tasks such as payroll. Conversely, this may be an opportunity to speak with upper management about poor internal controls, and highlight how their cost cutting may actually be hurting their business, or creating unnecessary risks for shareholders. Management likely to be exclusively focused on tangible/direct cost cutting, while disregarding the potential for indirect costs such as misstatements through error or fraud, employee dissonance, and undesirable regulatory attention.

Helping Susan creates glaring threats to independence, and is in direct contradiction to the objectivity principle. There is a major potential for bias due to self-review, as the audit engagement team will be effectively preparing the source documents for the accounting costs of closing the facility, and then will be ‘auditing’ their own work. It could be assumed that closing the facility is a somewhat sensitive and political issue, thus it is sure to garner the attention of the regulatory body, especially if there is an adverse effect on the stock price of MHA. If the audit firm came under scrutiny as a result of blurring the lines of independence this could have several direct and indirect costs, such as damage to reputation, as well as any potential legal liability and fines, not to mention losses incurred by investors/other stakeholders. Providing non-audit services to MHA also threatens advocacy, as the general perception may arise that the audit team are supporting managements’ unquestionably poor ‘tone at the top’, as evidenced by cutting down staff and other costs, as well as closing the pillow facility.

Strategy 2 – Refuse to provide any further guidance, given that you are the companys auditor, not its accountant
Refusing to provide any further guidance ultimately limits any potential conflict of interest between the auditor and the audit client, however doing so is somewhat counterproductive. The key advantages of refusing to help Susan include; maintaining professional skepticism, upholding the mandate set by the AICPA requirements on independence, as well as highlighting potential risk areas and internal control weaknesses when undertaking the actual audit.

Professional skepticism requires the auditor to have the capacity and willingness to decide issues in an unbiased and objective manner, irrespective of whether the decision may have negative consequences for the client, or the audit firm. It would be extremely difficult to remain objective if Susan was assisted by the audit engagement team when preparing source documents pertaining to closing costs. Not only would this contravene professional skepticism, but it fails the test of independence set out by the AICPA as the engagement team would in effect be auditing their own work. At a minimum, I believe assisting Susan would threaten independence in the following two ways:

Self-review threat – helping Susan create source documents would likely constitute providing non-audit work, and thus the engagement team could be seen as auditing their own work

Advocacy threat – it is obvious Susan is under pressure, “If you can help me figure this out, I really owe you one”, and if aid is provided, it may appear than the engagement team is prioritising Susan’s needs as opposed to the needs of external users of financial statements.

Another key advantage of taking the ‘backseat approach’ is the fact that any glaring weakness in internal controls will be highlighted. If Susan is unable to complete the task in time, it could point toward a lack of training and poor tone from upper management, both of which have been demonstrated by the moratorium of unnecessary expenses (including training), staff layoffs, and limited guidance and support from corporate headquarters.

The primary disadvantage with leaving Susan to her own devices when calculating the closing costs for NYH are mainly centred on reliability of source documents, potential delays to audit completion, and potential damages to the relationship between the audit client and the auditor (PwC).

The auditor is required to identify and assess a client’s risks of material misstatement whether due to fraud or error as a part of planning the audit, so leaving Susan with no assistance makes the audit task more difficult and will require further testing to ensure the accuracy of financial statements. Naturally, further testing takes more time, and thus incurs higher audit costs on the company which is already struggling to make ends meet. Furthermore, as MHA is a public company, the deadline may lapse if Susan is required to seek the assistance of the company accountant, not to mention

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Timeliness Of The Audit And Closing Costs. (June 26, 2020). Retrieved from https://www.freeessays.education/timeliness-of-the-audit-and-closing-costs-essay/