Apollo denied our request to speak with the predecessor auditors because of “litigation concerns.” I’ve looked at the 8-K filed by Apollo and the auditors referenced in the 10-K. I didn’t attach a copy because it didn’t say much, just something about “incongruent goals,” blah, blah, blah. Against my advice, Arnold decided to accept the engagement anyway. Keep your eyes open!
The good news is that the predecessor auditors, Smith and Smith, CPAs, have a good reputation, so you can use last year’s audited numbers from the 10-K. The bad news is that we don’t have access to prior year working papers. You’ll need to come up with programs for the substantive audit procedures for each of the functional balance sheet areas (indicated with an asterisk (*) below). You can download copies of the audit programs from AuditNet (www.auditnet.org) under “Auditors Sharing Audit Programs” or get them from an old auditing textbook. My preference is to place the audit programs at the beginning of each section. Label the sections as follows:
GA series (GA-1, GA-2, etc.) General and Administrative (Planning) ICC seriesRevenue/Collection Cycle Internal Control Evaluation ICD seriesPurchasing/Disbursements Internal Control Evaluation ICP seriesPayroll Internal Control Evaluation
A seriesTrial Balance/Financial Statements/Adjustments/Footnotes B series*Cash Substantive Workpapers
C series*Accounts Receivable Substantive Workpapers
D series*Inventory Substantive Workpapers
E series*Prepaids Substantive Workpapers
F series*Property, Plant and Equipment Substantive Workpapers I series*Other Assets Substantive Workpapers
L series*Current Liabilities Substantive Workpapers
N series*Notes Payable Substantive Workpapers
Q series*Stockholders’ Equity Substantive Workpapers
R series*Revenue Substantive Workpapers
X series*Expenses Substantive Workpapers
Because we are so understaffed during busy season, you are going to have to perform the bulk of the audit yourself. I was only able to get you a spring intern (Bradley Crumpler) from Caledonia State University (heck, I didn’t even know they had an accounting program!). He is the only unassigned person in the office right now. Because I am unsure of his training, I suggest that you only use him for “grunt work.” Also, I checked into the background and experience of Karina Ramirez, Apollo’s Internal Auditor. Apparently, she was an auditor with a Big 4 firm for 8 years before coming to Apollo and has served on the state CPA society’s ethics committee. I also went through her workpapers; they appear to be top-notch. Lastly, she reports directly to the Audit Committee, so we can rely on her to be objective. I think we can rely on her work during our engagement.
P.S. Thanks for drafting the engagement letter. I only had to make a couple of changes before Arnold signed it.