Case study: Audit Client Considerations Lanny Beaudean joined the CPA firm of Cardinal & Coyote LLP in 2008 after working for two years for the IRS in Phoenix, Arizona. The firm is a second-tier CPA firm just below the Big Four in size. Beaudean had passed all four parts of the CPA Exam in Arizona and decided to work for a locally based CPA firm with international clients to gain a broad base of experience that might help him become a CFO at a public company in the future. Beaudean has been advancing rapidly and just became a senior at Cardinal & Coyote. Yancy Corliss is a new audit partner at Cardinal & Coyote. One day Corliss was summoned to the office of Sharon Rules, the managing partner of the firm. Rules told Corliss that she had been approached by a new client, Jost Furniture International. Jost is a large southwestern chain of home furniture rental catering to young upscale individuals who might live in a city for two years or so and then move on. It recently opened an office in Canada and plans to expand to Europe in the not-too-distant future. Top management at Jost seemed to imply that the firm would get the audit as long as it submitted a reasonable bid. Rules asked Corliss to do background checks on Jost and make whatever inquiries were necessary to assess the potential business risk of Jost as a future client. Corliss was given three days to do the work and report back to Rules with a recommendation. If the decision is to go ahead, then Cardinal & Coyote would submit a bid and compete with one other CPA firm for the account. The firm believes it will be a lucrative account, especially since the company has been in an expansion mode and will require advice on acquisitions and other advisory services in the future. Corliss assembled his team to review the background and other information about Jost Furniture. Corliss asked Beaudean to head up the assessment and report back to Corliss in two days. During that time, Beaudean would have two other staff members to help with the assignment. Beaudean was excited about his first opportunity to work on new client assessment. Beaudean met with Vinnie Gabelli, a transplanted Brooklyn native who had graduated from Arizona State University (ASU) at Phoenix. Gabelli was like a fish out of water in Arizona even though he had spent 16 months in the master's of accounting program at ASU. Gabelli thought a prickly pear was someone who could not make it in Staten Island and moved to Brooklyn for a better life. Gabelli told Beaudean that he welcomed the opportunity to work with a native of Phoenix and learn about its colorful history. Beaudean also asked Jackie Oloff, a native of Minneapolis, to join the team. Jackie had moved to Phoenix two years ago with her husband, who is a professor of accounting at ASU. The team discussed mutual responsibilities, data sources for the information, key areas of risk, and then they broke up to start their work. At the end of the day, the team reassembled to sh.

1. Case study: Audit Client Considerations
Lanny Beaudean joined the CPA firm of Cardinal & Coyote LLP
in 2008 after working for two years for the IRS in Phoenix,
Arizona. The firm is a second-tier CPA firm just below the Big
Four in size. Beaudean had passed all four parts of the CPA
Exam in Arizona and decided to work for a locally based CPA
firm with international clients to gain a broad base of
experience that might help him become a CFO at a public
company in the future. Beaudean has been advancing rapidly
and just became a senior at Cardinal & Coyote.
Yancy Corliss is a new audit partner at Cardinal & Coyote. One
day Corliss was summoned to the office of Sharon Rules, the
managing partner of the firm. Rules told Corliss that she had
been approached by a new client, Jost Furniture International.
Jost is a large southwestern chain of home furniture rental
catering to young upscale individuals who might live in a city
for two years or so and then move on. It recently opened an
office in Canada and plans to expand to Europe in the not-too-
distant future. Top management at Jost seemed to imply that the
firm would get the audit as long as it submitted a reasonable
bid.
Rules asked Corliss to do background checks on Jost and make
whatever inquiries were necessary to assess the potential
business risk of Jost as a future client. Corliss was given three
days to do the work and report back to Rules with a
recommendation. If the decision is to go ahead, then Cardinal &
Coyote would submit a bid and compete with one other CPA
firm for the account. The firm believes it will be a lucrative
account, especially since the company has been in an expansion
mode and will require advice on acquisitions and other advisory
services in the future.
Corliss assembled his team to review the background and other

2. information about Jost Furniture. Corliss asked Beaudean to
head up the assessment and report back to Corliss in two days.
During that time, Beaudean would have two other staff members
to help with the assignment. Beaudean was excited about his
first opportunity to work on new client assessment.
Beaudean met with Vinnie Gabelli, a transplanted Brooklyn
native who had graduated from Arizona State University (ASU)
at Phoenix. Gabelli was like a fish out of water in Arizona even
though he had spent 16 months in the master's of accounting
program at ASU. Gabelli thought a prickly pear was someone
who could not make it in Staten Island and moved to Brooklyn
for a better life.
Gabelli told Beaudean that he welcomed the opportunity to
work with a native of Phoenix and learn about its colorful
history. Beaudean also asked Jackie Oloff, a native of
Minneapolis, to join the team. Jackie had moved to Phoenix two
years ago with her husband, who is a professor of accounting at
ASU. The team discussed mutual responsibilities, data sources
for the information, key areas of risk, and then they broke up to
start their work. At the end of the day, the team reassembled to
share information. Here is a brief list of the findings:
1. The predecessor firm had helped Jost Furniture with its
initial public offering and audited the financial statements of
the company for five years. The firm resigned the account in
2007, following the issuance of a modified opinion on the 2006
financial statements. The firm had issued an unqualified opinion
with an explanatory paragraph that raised questions about the
ability of Jost to continue as a going concern because of
persistent operating losses that threatened the company's ability
to secure needed financing.
2. A second firm audited the financial statements for 2007. That
firm also raised going-concern questions and was dismissed by
Jost's top management.
3. Jost's financial statements for 2008 and 2009 were audited by
a third firm that was dismissed after two years.
4. The financial statements for 2010 had not been audited and

3. on March 19, 2011, the CEO of Jost Furniture, Jerry Jost,
approached Sharon Rules at a community event and asked her to
submit a bid for the Jost audit. Jost asked that the bid be
submitted by March 23.
5. A memorandum to the file prepared by Rules indicated that
Jost had admitted to Rules that the company had past problems
with various auditors, but Jost assured Rules the going-concern
issues had been resolved. He also told Rules that the company's
controller had recently quit, the third time in four years there
had been a turnover at that position. Jost told Rules the
company had two candidates and he wanted her to help with the
final decision since the CPA firm would work closely with the
controller.
6. Beaudean, with the help of Gabelli and Oloff, reviewed the
financial statements of Jost Furniture for the past four years
during which time going-concern explanatory paragraphs had
been issued. They went through a checklist of risk assessment
issues for new clients and stopped when they came to the
following: Verify the circumstances of any prior auditor
dismissal or withdrawal by first asking the client for permission
to approach the predecessor auditor(s). All three auditors felt
this should be done by Yancy Corliss.
At the meeting at the end of the first day, the auditors discussed
the unusual number of auditor changes in a short period of time
apparently due to going-concern issues that were raised in the
audit reports for the years 2006 through 2009. Beaudean asked
Gabelli to contact the two banks where the company does
business and check into its payment record. Oloff had a past
business relationship with Miles Frazer, the attorney for Jost
Furniture. Oloff agreed to contact Frazer to determine whether
there are any outstanding litigation issues or other legal matters
that the firm should know about. They all agreed to get these
matters done by the end of the second day and a meeting was set
for 5:00 p.m.
Gabelli found out that a $1 million loan payable to Phoenix
Second National Bank had been overdue before payment had

4. been made March 15, 2011. The president of the bank told
Gabelli that Jost had been in violation of a debt covenant
agreement that obligated Jost to maintain a current ratio of 1.5:1
at all times and that the bank was concerned about Jost's ability
to continue as a going concern, pointing out that Jost had gone
below the ratio twice. The first time Jost had violated the
covenant, the bank accepted the explanation of a temporary cash
flow problem. The bank granted the company a three-month
extension to meet the requirements of the debt covenant. The
bank subsequently found out the cash flow problem had been
due to the fact Jerry Jost withdrew $500,000 from the Jost cash
account at Second National Bank to help put a down payment on
a mortgage loan to buy an upscale house in Scottsdale. The
second time it occurred, the bank began foreclosure on the loan
on January 31, 2011, but by the time the process had been
completed, Jost had paid off the entire $1 million balance.
Oloff had no luck with the Frazer, the attorney for Jost. When
she called his offices, the secretary always told Oloff that
Frazer was on another line and she'd take a message. When
Oloff asked to leave a voice-mail message, she was told Frazer
did not have voice mail. How about leaving an e-mail message?
she asked. No e-mail either. Can I text him, tweet him, or just
do it the old-fashioned way and set up an appointment? No, no,
no were the answers. Oloff had left five messages for Frazer in
the time before the meeting. She had nothing to report except to
make an editorial comment about lawyer responsiveness, or lack
thereof.
At first, Jost had side-stepped Corliss's request for permission
to speak with the predecessor auditor. Jost claimed that there
had been a “personality conflict” and Jost was afraid the auditor
would speak negatively about the company. Jost did agree after
Corliss reminded him it was a required part of the procedures
auditors follow in making the client acceptance decision.
At 5:00 p.m. on March 22, the auditors met in the firm's
conference room to discuss their findings. After hearing about

5. Gabelli's concerns and Oloff's lack of success with Frazer,
Beaudean expressed serious concerns about taking on Jost as a
client.
Read the above case. Choose one of the individuals in the case
and identify their actions and viewpoints. Write up an executive
summary on the case, including answers to the following
questions.
1. Brief review of the case from your auditor's point of view
(one paragraph)
2. Identification of the key behaviors, attitudes, and ethical
dilemmas faced by or caused by the auditor
3. Assessment of the philosophical and practical approaches to
ethical decision-making that could have avoided the problems in
the case
4. Evaluation of alternatives to solve the situation in the case
5. Summary of actions that you might have taken yourself if you
had been in this situation in real life