Benjamin M. Rogers is the president of the Lakeside Company, a retailer and distributor of consumer electronics (such as televisions) based in Richmond, Virginia. Although King and Company CPAs, a Richmond firm, had previously audited Lakeside, Rogers has recently become aware of the CPA firm of Abernethy and Chapman from reading several advertisements. His interest in the firm was heightened when he discovered that Abernethy and Chapman audit the primary bank with which he does business. During March of 2012, Rogers contacted his banker who arranged for Rogers to have lunch with one of the CPA firm’s partners. At that time, a wide-ranging conversation was held concerning Lakeside as well as Abernethy and Chapman. Rogers discussed the history of the consumer electronics company along with his hopes for the future. The partner, in turn, described many of the attributes possessed by his public accounting firm. Subsequently, Rogers requested a formal appointment with Richard Abernethy, the managing partner of Abernethy and Chapman, in hopes of arriving at a final conclusion concerning Lakeside’s 2012 audit engagement.
A June1 meeting was held at the accounting firm’s Richmond office and was attended by Abernethy, Rogers, and Wallace Andrews, an audit manager with the CPA firm who would be assisting in the investigation of this prospective client. Both auditors were quite interested in learning as much as possible about the consumer electronics business. Although a number of similar operations are located in the Richmond area, Abernethy and Chapman has never had a client in this field. Thus, the Lakeside engagement would offer an excellent opportunity to break into new market.
During a rather lengthy conversation with Rogers, Abernethy and Andrew were able to obtain a significant quantity of data about the Lakeside Company and the possible audit engagement. Included in this information were the