Your case analysis submissions should include the following:
• Section 1: A brief summary of the key facts of the case – this should be no longer than a paragraph (or one slide for presenting groups).
• Section 2: A list of the professional standards applicable to the case. Each of your listings should include the codification number and title of the standard as well as a reference to the pertinent paragraph(s) within the standard if appropriate. E.g. PCAOB AS 2401: Consideration of Fraud in a Financial Statement Audit paragraphs .13-.52
• Section 3: Responses to all the questions required for the case study. Be sure to support your response with cites of applicable standards (which you would have listed above) as appropriate. Organize your responses in the same order the questions are asked in the case study. Start each response by first restating the question.
• Section 4: Reflect on all of the questions/responses in section three. Given your critical analysis of the case materials, think about any other relevant questions about the case you would like to have answers to that weren’t asked as part of the required case study questions. List 1-3 questions you would like to pose to the group leading the case study presentation in class. Posing your questions live during our case discussions in class will help stimulate further discussion of case issues and contribute to your participation grade in the class
For Section 3, please answer the Question 1-6.
Requirements: one paragraph
493CASE 6.3Madison Wells, Audit ManagerMadison Wells should have been happy.1 Another hectic busy season was coming to an end, which meant the audit managerÕs standard workload would drop from 55 to 65 hours per week to a much more reasonable 45 hours. But Madison wasnÕt thinking of the end of busy season or the spare time that she would now have each week or the beautiful weather in coming months.As she sat in the audit conference room that Monday morning in early March, MadisonÕs world seemed to be crumbling around her. She was staring at her cell phone that lay in front of her on the conference room table. The speaker was not on, but it didnÕt matter. She could easily hear the expletives being screamed at her by the audit partner who was on the other end of the line.Transitioning from the TrenchesThe busy season that was winding down had been notable for Madison because it was her first as an audit manager for her employer, a large practice office of a Big Four accounting firm. Her promotion from audit senior to audit manager had become effective five months earlier on October 1, one month following her five-year anniversary with the firm.During each of the previous two busy seasons, Madison had served as the super-vising audit senior on the audit of Smith & Kinder Manufacturing, a privately-owned company that produced a line of household appliances. As the onsite audit supervi-sor, her primary responsibilities had been encouraging and cajoling her five subor-dinates to complete their assignments within budget, bailing them out when they got ÒstuckÓ on tough technical issues, reviewing their completed workpapers, and keeping the audit manager informed of the overall progress being made on the engagement. She had also served as the primary contact person with the clientÕs accounting staff and controller. On a few occasions, she had dealt directly with the clientÕs C-suite executives, most notably the chief financial officer (CFO).Madison was ecstatic when she received the news that she had been promoted to audit manager. Rather than working in the ÒtrenchesÓ on one audit engagement dur-ing busy season, in her new position, she would coordinate multiple audits at once. In addition to frequent visits to the audit teams she was overseeing, Madison would spend considerable time working from her private office at her employerÕs down-town locationÑfor the past three years, she had shared a cubicle in the audit senior Òbullpen.ÓMadisonÕs first unpleasant surprise had come in early October when she was trans-ferred off the Smith & Kinder audit team. She had assumed she would replace the audit manager on that team and be assigned to serve as the audit manager on two to four smaller jobs. Transitioning from audit senior to audit manager on the Smith & Kinder engagement would have allowed her to ease gradually into her new work role. But when her practice office unexpectedly picked up a new oil and gas client, Daniel Alanis, an audit partner with whom she had worked in the past, requested that she 1. This case was developed from information provided by a former audit manager. The names, location, and certain other information, including the industry of the audit client, have been changed.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
494 SECTION SIX PROFESSIONAL ROLESbe assigned to that new client, Le Prix Oil & Gas. Madison realized Alanis made that request because he respected her and the quality of her work. Nevertheless, in her mind, she was a questionable choice for the new engagement since she had only worked on two oil and gas audits during her five-year public accounting career. And those assignments had been during her first two years with her employer when she was an entry-level auditor.Making the Le Prix assignment even more challenging for Madison was the high-risk nature of the engagement. During the past year, a sudden downturn in oil prices had slashed Le PrixÕs revenues and forced its management team to hurriedly down-size the companyÕs operations and workforce. Le PrixÕs rapidly deteriorating operat-ing results magnified its overall business riskÑthe company was highly leveraged with a debt-to-equity ratio topping 4.0. The most ominous audit risk factor, though, was the aggressive stances that the companyÕs accounting staff apparently took on accounting and financial reporting issues. During a brief telephone conversation after Madison was assigned to the Le Prix audit, Daniel Alanis told her that the company had twice been forced to issue financial restatements over the previous seven years.ÒI can imagine that in the current environment, these guys will ratchet up their earnings management efforts several-fold,Ó Alanis warned Madison before adding, Òso, buckle your seatbelt, this may be a bumpy ride.ÓAt the time, Madison wondered to herself why her practice office would take on such a high-risk client. She didnÕt raise the issue with Alanis because she didnÕt believe it was appropriate to do so. In her firmÕs culture, it was not considered kosher to challenge or criticize decisions made by partners.On the bright side, Alanis arranged for Madison to have a light schedule of other audit assignments during the busy season. Her only other audit clients during the winter months were a small, family-owned chain of clothing stores and a regional healthcare company that owned and operated Òwalk-inÓ medical clinics. Neither of those clients proved to be particularly challenging for Madison. The same could not be said for Le Prix Oil & Gas.Hostile Work EnvironmentThroughout the Le Prix audit, Madison repeatedly skirmished with the companyÕs controller and CFO over accounting and financial reporting issues. Some of those issues required her to spend considerable time gaining a better understanding of technical accounting and financial reporting topics unique to the oil and gas indus-try. Despite her inexperience as an audit manager and her relative unfamiliarity with the industry, Madison held her own during those confrontations. On two occa-sions, the clientÕs CFO Òwent over her headÓ and insisted on a sit-down conference with Alanis. During those meetings, which Madison attended, Alanis was fully sup-portive of her and the stance she had taken on the issue at hand.Prevailing in the confrontations with the client was not without some downside for Madison and her subordinates. By the end of the audit, Le PrixÕs CFO, controller, and other key members of the companyÕs accounting staff were clearly unhappy with the team of auditors. Madison realized the client perceived her as inflexible, if not down-right stubborn, when it came to resolving questions concerning the materiality of financial statement amounts, revenue recognition issues, and other technical matters. Madison came to suspect that the clientÕs relationship with its prior audit firm was responsible for the difficulty she and her colleagues encountered on the Le Prix audit.The companyÕs previous auditor was a regional accounting firmÑduring the past year, Le PrixÕs principal lender had required the company to retain a Big Four audi-tor as a condition for approving a new long-term loan. The copies of the prior year Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 6.3 MADISON WELLS, AUDIT MANAGER 495workpapers that the predecessor audit firm provided to MadisonÕs firm suggested that client personnel had often bullied the previous auditors into submission when differ-ences of opinion arose during the audit. Despite that impression, the Form 8-K that Le Prix had filed with the Securities and Exchange Commission (SEC) to announce the change in auditors had not reported any disagreements between the company and its prior audit firm.Over lunch one day, Alanis told Madison he planned to meet with Le PrixÕs CFO and controller after the audit was completed to try to soothe the hard feelings that had cropped up during the engagement. Because Le Prix was a large client, it was apparent to Madison that Alanis wanted to minimize the risk that the companyÕs man-agement team would dump their firm after just one year. Later in that same lunch, Alanis candidly admitted to Madison that their practice office would Òtake a bathÓ on the Le Prix engagement because the audit fee was considerably Òbelow market.Ó The audit partner confessed that he personally wasnÕt a Òbig fanÓ of ÒlowballingÓ to obtain new clients. Alanis then explained that the office managing partner was using the Le Prix engagement as a Òloss leaderÓ to enhance the practice officeÕs chances of add-ing other local oil and gas companies to its client portfolio. The practice office was playing Òcatch upÓ with the other Big Four firms in the local market when it came to acquiring a proportionate number of audit clients in TexasÕs huge oil and gas industry.Frequent disagreements with client personnel over accounting and financial reporting issues were not the most significant challenge Madison faced during the Le Prix audit. William Blackwell, the supervising audit senior on the engagement, shocked his team membersÑMadison and Alanis, in particularÑby resigning as of January 15. His resignation had left the Le Prix audit team in a huge bind. Because there were no unassigned seniors available in the practice office, Alanis had been forced to replace Blackwell with an inexperienced audit associate and have Madison step in and supervise the remainder of the fieldwork on the engagement while, at the same time, continuing to serve as the audit manager.In exchange for her increased workload on the Le Prix audit, Alanis arranged to have Madison replaced on the healthcare audit to which she had been assigned. Because her principal subordinate on her only other audit clientÑthe small retail companyÑwas a ÒheavyÓ senior, she spent only a few hours each week at that clientÕs site.A Perfect StormOn a Monday morning in early March, Madison and her subordinates were wrap-ping up loose ends on the Le Prix audit. She expected that they would be leaving the clientÕs headquarters office for good by the end of the week. Three days earlier, on the prior Friday afternoon, Le Prix had issued its earnings press release and filed its Form 10-K for the year under audit with the SEC. Daniel Alanis had signed the unqualified audit opinion that accompanied Le PrixÕs audited financial statements in its 10-K.As Madison sat in the client conference room that had served as Audit Central for the past four months, she was skimming through the lengthy Le Prix audit program. She wanted to make sure one final time that each audit procedure had been initialed and dated by the individual who had completed the procedureÑa few of the Òwrap-upÓ audit tests were not yet completed. Suddenly, something caught her attention. There were two audit steps that dealt with reviewing the minutes of the clientÕs board of directors meetings. The first step referred to all meetings that had taken place dur-ing the year under audit, while the second step referred to any meetings between year-end and the date the client filed its 10-K with the SEC. Madison noticed for the first time that both steps had been initialed and dated by William Blackwell on January 10.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
496 SECTION SIX PROFESSIONAL ROLESWhat concerned Madison was a board meeting that had taken place on February 4. She realized that since Blackwell had left the Le Prix audit team on January 15, there was no way he could have reviewed the minutes of the February 4 board meeting. There had been a board meeting on January 6, and Blackwell had apparently signed off on the second audit step after reviewing the minutes of that meeting.Momentarily panic-stricken, Madison forced herself to calm down. It was very unlikely any major events or circumstances affecting Le PrixÕs just-released financial statements had been documented in the minutes of the February 4 board meeting. Nevertheless, she intended to investigate that possibility immediately.Madison went to the office of the chief executive officerÕs secretary and asked for a copy of the minutes of the February 4 meeting. The helpful secretary retrieved those minutes and made a copy for her.As she was re-entering the audit conference room a short while later, MadisonÕs heart sank. The final paragraph of the minutes referred to Òtechnical violations of debt covenants in the Amended Loan Agreement at year-end.Ó The paragraph went on to indicate that the violations involved certain debt covenants that had been mod-ified in the revised loan agreement. Nine months earlier, when Le Prix obtained an additional long-term loan from its principal lender, which was a syndicate of insur-ance companies, the two parties had renegotiated their existing long-term debt agreement. One feature of the amended debt agreement was the requirement that Le Prix obtain a Big Four auditor.According to the minutes of the February 4 board meeting, the company had ÒcuredÓ the debt covenant violations during the first week of the new fiscal year by selling marketable securities and then using the cash proceeds to pay down certain current liabilities. Because the violations were ÒminorÓ and had Òonly existed for a brief time,Ó Le PrixÕs board concluded there was no need to inform members of the lending syndi-cate of the violations or to disclose the violations in the year-end financial statements.ÒPar for the course for these bozos,Ó Madison angrily mumbled as she flung the copy of the board minutes onto the cluttered surface of the audit conference room table. She was angry with herself for not discovering the debt covenant violations but furious at Le PrixÕs officers and accounting staff for not having brought the violations to the attention of herself or her subordinates.Madison knew that the degree to which any debt covenant was violated or the length of time that the violation existed were non-issues since there was no clause in Le PrixÕs loan agreement regarding ÒminorÓ debt covenant violations. And she was aware the only way for Le Prix to properly ÒcureÓ or resolve a debt covenant violation ex post was to obtain a waiver from each member of the lending syndicate. Absent waivers from all syndicate members, the cumulative long-term loans from the syn-dicate became immediately due and payable, meaning that they should have been reflected as a current rather than a long-term liability in the financial statements Le Prix had filed three days earlier with the SEC. That change would have grosslyÑand adverselyÑimpacted Le PrixÕs reported financial condition.After digging into the large audit trunk in the rear of the audit conference room, Madison finally found and retrieved a folder labeled ÒAmended Loan AgreementÓ among the permanent workpaper files. She then flipped to the debt covenant pages marked with a red tab. Embedded in the covenants were the minimum levels of sev-eral liquidity ratios Le Prix had to maintain at the end of each quarter to avoid trig-gering a technical default of its cumulative long-term loans.Next, Madison retrieved the long-term debt workpaper file and turned to the spread-sheet where William Blackwell had tested Le PrixÕs compliance with the liquidity ratio provisions in the debt covenantsÑshe recalled having reviewed that workpaper two weeks earlier. As always, BlackwellÕs workpaper appeared flawless. The spreadsheet Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 6.3 MADISON WELLS, AUDIT MANAGER 497included a detailed legend, cross-references to other workpapers and documents, and meticulous footnotes that precisely explained the procedures he had performed. On the spreadsheet, Blackwell had computed the liquidity ratios relevant to Le PrixÕs debt covenants at the end of each quarter and compared them to the minimum levels for those ratios established by the covenants. The spreadsheet demonstrated that in each case, Le PrixÕs quarter-ending ratio was above the designated minimum.Because of the apparently high quality of BlackwellÕs work, the tight budget for the Le Prix audit, and the fact that she was often overwhelmed by her dual responsibili-ties on the engagement, Madison had spent minimal time reviewing the workpapers the senior had prepared. Instead, she had allocated the bulk of her review time to the workpapers prepared by the audit associates assigned to the Le Prix engagement. In fact, she recalled having only scanned BlackwellÕs debt covenant spreadsheetÑshe didnÕt check any of his mathematical calculations or track the cross-referenced items to other documents such as Le PrixÕs loan agreement. She regretted that decision now as she stared at the workpaper spread before her on the conference room table.After cross-checking the spreadsheet with the tabbed pages in the Amended Loan Agreement, Madison discovered that the minimum levels of the liquidity ratios Blackwell had used in his debt covenant tests did not match up with those listed in that document. After taking a deep breath, Madison retrieved from the audit trunk another folder labeled ÒLoan Agreement,Ó which was the earlier and now outdated agreement between Le Prix and the syndicate of insurance companies. Sure enough, in testing the debt covenants Blackwell had referred to the minimum level required for each liquidity ratio in the old loan agreement instead of in the new loan agree-ment. In fact, a footnote on BlackwellÕs spreadsheet indicated that those minimum levels were drawn from Le PrixÕs ÒLoan Agreement.Ó There was no reference on the workpaper to Le PrixÕs ÒAmended Loan Agreement.ÓIn the revised debt covenants included in the Amended Loan Agreement, the mini-mum levels of the given liquidity ratios had been raised by 10 to 15 percent each. At the end of each quarter during the year under audit, Le Prix had exceeded the mini-mum thresholds established for those ratios in the previous loan agreement, as docu-mented by Blackwell. Madison determined that the company had also surpassed the minimum thresholds for those ratios in the new loan agreement for the first three quarters of the year. Unfortunately, two of Le PrixÕs liquidity ratios at the end of the fourth quarter were nearly 10 percent below the minimum level dictated by the new loan agreement.After checking and re-checking all of the relevant documents and computations, Madison leaned back in her chair and closed her eyes. She knew what she had to do next and she wasnÕt looking forward to it.Verbal ViolenceÒHow could this happen?Ó Alanis screamed over the phone. Before Madison could respond, the audit partner shouted again. ÒDo you understand that youÕre telling me that the financial statements that Le Prix just filed with the SEC are wronger than wrong!?ÓÒDaniel, like I said, IÕm sorry thatÑÓ ÒSorry?Ó Alanis cut off Madison in mid-sentence. ÒWhat in the do you mean, sorry? YouÕre sorry when you spill coffee on someoneÕs new shirt. YouÕre sorry when you ding the door of your friendÕs new sports car. Sorry doesnÕt apply in this set of circumstances, !ÓBefore calling Alanis, Madison had been very concerned he would not react well to the news she was about to give him. But she hadnÕt expected him to react this badly. She liked and respected the young partner who was no more than eight or nine years older than herself. He was a family man with two young daughters, was outgoing and Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
498 SECTION SIX PROFESSIONAL ROLESarticulate, and was well-respected within their practice office and the downtown busi-ness community. On a few occasions, Madison had seen him upset, but he had never raised his voice in anger or used improper language of any kind in her presence.For several moments, MadisonÕs cell phone, which she had laid on the conference room table, fell silent. She pictured Alanis sitting in his leather chair in his downtown office, trying to regain control of his emotions.ÒOkay . . . okay,Ó he finally muttered through gritted teeth. ÒTell me exactly what happened.ÓOver the next few minutes, a shellshocked Madison unraveled the sequence of events relevant to the quandary she and Alanis now faced. Because her nerves were frazzled, her timeline was not linear. At one point, she backtracked to explain that she had been reviewing the audit program that morning to ensure each audit proce-dure had been initialed and dated. That revelation detonated AlanisÕs temper once more.ÒSo, you are telling me that you just got around this morning to reviewing the audit program to determine that the audit proce-dures had been properly signed off on!?ÓMadison bit her lip and took a deep breath before responding. ÒI had checked the audit program on multiple occasions in the past few weeks. I was just checking it again . . . one more time.Ó Madison paused to allow the audit partner sufficient time to process that information before continuing. ÒLike I was saying, when I checked the audit program earlier, it hadnÕt occurred to me that William couldnÕt have reviewed the minutes of the February fourth board meeting since he had resigned three weeks earlier. He obviously signed off on that second audit step after he reviewed the January sixth minutes.Ó After another pause, Madison added softly, ÒHe just made an honest mistake . . . and then I . . . I made another one by . . .Ó MadisonÕs voice trailed off before she had completed her mea culpa.ÒSo, each of you just made an honest mistake?Ó Alanis asked in a mocking tone. Moments later, he thundered, ÒWe arenÕt allowed to make honest mistakes! We are professionals!ÓThe line fell silent for an extended time before Alanis finally spoke again, this time in short, wrathful bursts. ÒNow . . . why . . . didnÕt the tests . . . of the debt covenants . . . uncover . . . these violations?ÓMadison swallowed hard and then quietly but precisely explained to the part-ner why Blackwell had failed to uncover the debt covenant violations. Then she explained why her review of the seniorÕs work had failed to uncover his error in test-ing the debt covenants.After finishing her explanations, Madison waited for Alanis to respond. As she waited, she heard muffled noises on the other end of the line that sounded like a fist being pounded against a desktop.ÒYou . . . never noticed that on the workpaper, he referred to the wrong loan agreement?Ó Alanis had whispered the word ÒyouÓ and then slowly built to a crescendo that culminated with him shouting the word Òagreement.ÓMadison briefly contemplated defending herself and William Blackwell by pointing out that the similar titles of the two loan agreements had contributed to the oversights that each of them made. She quickly dismissed that idea after realizing it had been their responsibility to take steps to prevent the similar titles of the loan agreements from triggering such mistakes on their part. Then she considered reminding Alanis that he, too, had reviewed BlackwellÕs workpaper, but he beat her to the punch.ÒOh, I see,Ó Alanis said as his voice quaked in anger. ÒI guess you expected me to do the detailed review of his work.ÓCopyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CASE 6.3 MADISON WELLS, AUDIT MANAGER 499Alanis had every right to be angry, immensely angry. But, despite the terrible cir-cumstances they were facing, Madison didnÕt believe he had the right to speak to her so harshly, berating her with the ugliest of gutter language.ÒListen, someone is going to take the blame for this disaster,Ó Alanis con-tinued, Òand it sure as hell isnÕt going to be me!ÓBy this point, Madison decided she had absorbed enough of AlanisÕs rage and dis-respect. She had reached her tipping point.After a long pause, Madison spoke in a tone tinged with sarcasm. ÒDonÕt worry about it. IÕm the audit manager, and youÕre the audit partner. So, by definition, every-thing is my fault.Ó Madison intentionally used the inflammatory ÒDonÕt worry about itÓ line in hopes that it would prompt Alanis to once more curse a blue streak in which case she intended to hang up on him.Alanis, no doubt, sensed that Madison was on the verge of ending the conversation. With a herculean effort, he tamped down his emotions once more. After coughing and clearing his throat, he responded in as civil a tone as he could muster.ÒI have a few things to do here. Once I wrap them up, I will be driving over there to meet with you in the audit conference room. I should be there in 45 minutes. In the meantime, donÕt mention this to anyone, including anyone else on the audit team.Ó When Madison didnÕt respond, Alanis added, ÒOkay?ÓThe sudden change in AlanisÕs tone had an unexpected impact on Madison. Rather than anger and resentment, she now felt shame. Because she didnÕt want Alanis to realize she was tearing up, she cleared her throat and responded ÒOkayÓ before dis-connecting the line.When Alanis arrived at the audit conference room, he closed the door and then took off his suit jacket and tossed it on an empty chair.ÒI would like to start by reviewing WilliamÕs workpaper where he documented his tests of the debt covenants,Ó the partner said calmly as he avoided making eye con-tact with Madison.ÒI have already pulled that workpaper for you,Ó Madison responded as she tried to keep her voice from trembling. ÒI also dog-eared the specific sections of the new and old loan agreements that pertain to the liquidity ratio provisions within the debt covenants.Ó After handing the workpaper and the two loan agreements to Alanis, Madison asked if there was anything else that he needed.ÒNo, not right now. I will let you know, though, if I need something else.ÓMadison was thankful Alanis was making a concerted effort to maintain his com-posure. Despite that effort, the tension in the conference room was almost more than she could bear.After Alanis sat down on the other side of the conference room table, Madison noticed the first thing he did was glance at the small box in the upper right-hand corner of the preformatted workpaper. Ten days earlier, Alanis had initialed and dated the workpaper, indicating that he had reviewed it. MadisonÕs initials and a cor-responding date were also included in that box.Alanis studied the workpaper and read and re-read the relevant sections of both loan agreements. He then retrieved the audit program and turned to the section that included the two audit steps mandating that the minutes of board of directorsÕ meet-ings be reviewed.After spending 20 minutes or more examining the documents, Alanis leaned back in his chair and muttered a vulgar, one-syllable expletive under his breath. Madison heard the expletive but ignored it as she continued to work on updating a digital audit workpaper on her laptop computer.Moments later, Alanis wearily got to his feet and put on his suit jacket. ÒIÕm going back to the office now,Ó he said in a subdued tone.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
500 SECTION SIX PROFESSIONAL ROLESAs Alanis spoke, Madison looked up from her work. It was the first and only time during the brief meeting that the two of them made direct eye contact. After nodding her head, Madison refocused her attention on her laptop computer. Alanis then left the conference room without saying another word.EPILOGUEMadison and her subordinates completed their remaining work on the Le Prix audit late on Friday afternoon, four days after she informed Daniel Alanis of the companyÕs debt covenant violations. The following week, Madison spent each day in her downtown office planning and organizing two new audit assignments she had been given for companies with June 30 fiscal year-ends. Late on Thursday afternoon of that week, Madison summoned the courage to go to AlanisÕs officeÑshe had not heard anything from him over the previous 10 days.When Madison knocked on his open door, Alanis looked up and then asked matter-of-factly, ÒCan I help you?ÓÒI was just wondering, if . . . if . . . you needed me to do anything more on the Le Prix audit.ÓÒNo,Ó Alanis replied firmly.For several moments, Madison lingered at AlanisÕs door. Finally, she took the initiative. ÒHave you resolved the issue that . . . uh . . . uh . . . came up at the end of that audit?Ó ÒYep,Ó the partner replied tersely.As the two of them stared at each other, it quickly became evident to Madison that Alanis was not going to share with her how the issue had been resolved. Instead of pursuing the mat-ter, Madison turned and walked away.Over the next several months, Madison accessed on multiple occasions the www.sec.gov/edgar website, where public companies electronically file their SEC documents. Le Prix never posted an 8-K information filing or any other SEC filing that disclosed its debt covenant violations. In early October, just as the plan-ning for year-end audit engagements was com-mencing, Madison resigned from her Big Four employer after accepting a considerably higher-paying position as a financial analyst with a major downtown bank.Questions1. What steps should auditors take when they discover circumstances which were unknown to them at the audit report date that might have affected the report they issued?2. Do you agree with Daniel Alanis that auditors are not entitled to make Òhonest mistakesÓ? Defend your answer.3. Characterize the errors made by William Blackwell and Madison Wells as either Òhonest mistakes,Ó negligence, or recklessness. Defend each of your characterizations.4. While reviewing the long-term debt workpapers, neither Madison nor Alanis discovered the critical error Blackwell had made when testing Le PrixÕs compliance with its debt covenants. What auditing standards, if any, dictate that audit workpapers be reviewed by senior members of an audit team? What is the overall nature and purpose of the audit workpaper review process, and how thorough or detailed should workpapers be reviewed?5. In your opinion, how should Madison have reacted to AlanisÕs temper tantrum? What would you do in a similar set of circumstances?6. When Alanis refused to discuss with Madison how Le PrixÕs debt covenant violations had been addressed, what alternatives were available to her? Place yourself in her position. Which of those alternatives would you have chosen?Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203