Case 1-3: Independence
Read the Deloitte Data Trappers Case posted on Blackboard. Complete the following questions we are using for our case assignment:
1. Make an argument for why the audit firm is independent.
B&T is independent because they were indirectly working with a subsidiary that represents less than 2% of Data Trappers business. Once B&T was offered the contract to provide auditing services to Data Trappers, all of their previous bookkeeping up to that point in the current year was destroyed and redone by an internal audit team at Data Trappers. In this case the prospective firm, B&T, severed all ties to the client, Data Trappers, prior to beginning the audit.
2. Make an argument for why the audit firm is not independent.
Section 0.400.21.b of the AICPA Code of Professional Conduct defines independence in ...view middle of the document...
B&T has only been removed from the relationship for less than two years. There also appears to be a conflict of interest because the firm would be auditing financials from previous years that they would have created. They could not audit their own work and maintain their independence. It could appear that B&T saw these conflicts as well because they didn’t sign the engagement letter until after the bookkeeping was destroyed.
3. If you were the SEC, would you allow B&T to serve as the auditor (i.e., what is your conclusion about whether the firm is independent)? Why or why not?
If I were the SEC, I would not allow B&T to serve as the new auditor for Data Trappers because of the appearance that independence has been lost. The SEC themselves requires: “prospective firms cannot audit financial statements of years that they were not independent.” This is a problem because if B&T is allowed to become the auditing firm, then they would be auditing financial statements that they would have had a hand, albeit less than 1% of a hand, in creating those documents. The relationship is prohibited because they had a material indirect relationship with Data Trappers. The subsidiary B&T worked with, Data Chips, represented 1% of assets and 2% of income. Ultimately, independence in appearance to a reasonable person could be murky at best.
Independence and Conflicts of Interest - AICPA
Bibliography: Aicpa.org,. 'Independence And Conflicts Of Interest - AICPA'. N.p., 2015. Web. 14 Sept. 2015. Sec. 004.21.b
SECURITIES EXCHANGE COMMISSION
AUDIT COMMITTEES AND AUDITOR INDEPENDENCE
Bibliography: Securities Exchange Commission,. 'AUDIT COMMITTEES AND AUDITOR INDEPENDENCE'. N.p., 2015. Web. 12 Sept. 2015.