Tammy Potter, a new partner with the regional CIA firm to Tower & Tower, was rec

Question

Tammy Potter, a new partner with the regional CIA firm to Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real estate development firm, Tierra Corporation. Potter was quite excited when Edmond indicated that his corporation needed an audit, and he wished to discuss the matter with her. During the discussion, Potter was told that Tierra Corporation needed the audit obtain a substantial amount of additional financing to acquire another company. Presently, Tierra Corporation is successful, profitable, and committed to growth. The audit fee for the engagement should be substantial. Since Tierra Corporation appeared to be a good client prospect, Potter tentatively indicated that Tower & Tower wanted to do the work. Potter then mentioned that Tower & Tower’s quality control policies require an investigation of new clients and approval by the managing partner, Lee Tower. Potter obtained the authorization of Edmond to make the necessary inquiries for new client investigation. Edmond was found to be a highly respected member of the community. Also, Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative. As a final part of the investigation process, Potter contacted Edmond’s former tax accountant, Bill Turner. Potter was surprised to discover that Turner did not share the others’ high opinion of Edmond. Turner related that on an IRS audit 10 years ago. Edmond was questioned about the details of a large capital loss reported on the sale of a track of land to a trust. Edmond told the IRS agent that he had lost all of the supporting documentation for the transaction, and that he had no way of finding out the names of the principals of the trust. A search by an IRS auditor revealed that the land was recorded in the name of Edmond’s married daughter and that Edmond himself was listed as the trustee. The IRS disallowed the loss and Edmond was assessed a civil fraud penalty. Potter was concerned about these findings, but eventually concluded that Edmond had probably matured to a point where he would not engage in such activities. Required: a. Present arguments supporting a decision to accept Tierra Corporation as an audit client. b. Present arguments supporting a decision not to accept Tierra Corporation as an audit client. c. Assuming that you are Lee Tower set forth your decision regarding acceptance of the client, identifying those arguments from part (a) or (b) that you found most persuasive.

Explanation / Answer

a. Accepting Tierra Corporation as an audit client

1. Lewis Edmond and his business Tierra Corporation can be trusted as he is the chairman of the board of a local civil organisation and holds a high repest among the memebers of the community
2. Tierra Corporation sounds to be successful, profitable and committed to growth.
3. By auditing such a high profile client, Tierra Corporation can get a substantial audit fee.
4. Tierra Corporation was highly regarded by its banker and its attorney, and the Dun & Bradstreet report on the corporation reflected nothing negative.
5. Edmond would have probably matured to a point where he would not engage in any unethical and illegal activities after reaching such a high profile.

b.Not accepting Tierra Corporation as an audit client

1. Tammy porter is a new partner with the regional CIA firm Tower & Tower and taken up the responsibility as one of the board of directors of a local civic organization. With such a strong professionally responsible profile, Porter should not recommend Tower & Tower to accept the audit proposal.
2. Edmond’s former tax accountant, Bill Turner's opinion about Tierra Corporation is not positive pointing to the earlier IRS audit. As a former tax accountant of Edmond, turner will know the ways by which Edmond will evade taxes and policies.
3. Edmond was assessed a civil fraud penalty which shows his business ethics.

c.Conclusion

Though Edmond holds great respect in the society, his previous tax evading activity and the following civil fraud penalty paid by him shows that he is not a person to be trusted for the audit proposal. So it is better for Tierra corporaion to decline the audit request made by Edmond.

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