Summary: Christine, one of 3 partners at Leroux, Chagny, and Valerius (LCV) has a client, Angel of Music, Inc.,. LCV performs audit work as well as assist with tax preparation. Angel of Music, Inc.’s fees equate to $50,000 of LCV’s $1.4 million annual revenues. Because a client with a significant debt declared bankruptcy, Angel of Music is experiencing cash flow problems. Christine permitted Angel of Music to pay their $50,000 in fees over a 10-month time period. In 2013, Angel of Music was attempting to increase their line of credit, and the bank requested audited financial statements from 2012. Christine assigned audit senior, Erik and audit manager, Raoul to the engagement as she had much confidence in their work. Erik and Raoul planned the audit and Christine signed off on the audit plan without thoroughly reviewing their work. While doing the audit, Erik and Raoul determine that Angel of Music, Inc. has a going concern risk. When Christine learns of this, she realizes that Angel of Music still owes $25,000 in fees to LCV for work performed in 2011. Issues: 1. Independence 2. Integrity and Objectivity 3. Auditing Standards 4. Due Professional Care Rules: 1. AICPA Code of Professional Conduct. Section 100. Rule 101 – Independence - CPA members in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. 2. AICPA Code of Professional Conduct. Section 100. Rule 102 - Integrity and Objectivity - In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. 3. PCAOB Auditing Standards.  AU 110.02- Responsibilities and Functions of the Independent Auditor: The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected. 4. AICPA Code of Professional Conduct. Section 300. General Standards Rule 1.  (a) Professional Competence. Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence. (b) Due Professional Care. Exercise due professional care in the performance of professional services. (c) Planning and Supervision. Adequately plan and supervise the performance of professional services. (d) Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for ...

1. Summary:
Christine, one of 3 partners at Leroux, Chagny, and Valerius
(LCV) has a client, Angel of Music, Inc.,. LCV performs audit
work as well as assist with tax preparation. Angel of Music,
Inc.’s fees equate to $50,000 of LCV’s $1.4 million annual
revenues. Because a client with a significant debt declared
bankruptcy, Angel of Music is experiencing cash flow problems.
Christine permitted Angel of Music to pay their $50,000 in fees
over a 10-month time period. In 2013, Angel of Music was
attempting to increase their line of credit, and the bank
requested audited financial statements from 2012. Christine
assigned audit senior, Erik and audit manager, Raoul to the
engagement as she had much confidence in their work. Erik and
Raoul planned the audit and Christine signed off on the audit
plan without thoroughly reviewing their work. While doing the
audit, Erik and Raoul determine that Angel of Music, Inc. has a
going concern risk. When Christine learns of this, she realizes
that Angel of Music still owes $25,000 in fees to LCV for work
performed in 2011.
Issues:
1. Independence
2. Integrity and Objectivity
3. Auditing Standards
4. Due Professional Care
Rules:
1. AICPA Code of Professional Conduct. Section 100. Rule 101
– Independence - CPA members in public practice shall be
independent in the performance of professional services as
required by standards promulgated by bodies designated by
Council.
2. AICPA Code of Professional Conduct. Section 100. Rule 102
- Integrity and Objectivity - In the performance of any
professional service, a member shall maintain objectivity and
integrity, shall be free of conflicts of interest, and shall not

2. knowingly misrepresent facts or subordinate his or her judgment
to others.
3. PCAOB Auditing Standards. AU 110.02- Responsibilities
and Functions of the Independent Auditor: The auditor has a
responsibility to plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement, whether caused by error or
fraud.Because of the nature of audit evidence and the
characteristics of fraud, the auditor is able to obtain reasonable,
but not absolute, assurance that material misstatements are
detected.The auditor has no responsibility to plan and perform
the audit to obtain reasonable assurance that misstatements,
whether caused by errors or fraud, that are not material to the
financial statements are detected.
4. AICPA Code of Professional Conduct. Section 300. General
Standards Rule 1. (a) Professional Competence. Undertake only
those professional services that the member or the member’s
firm can reasonably expect to be completed with professional
competence. (b) Due Professional Care. Exercise due
professional care in the performance of professional services.
(c) Planning and Supervision. Adequately plan and supervise
the performance of professional services. (d) Sufficient
Relevant Data. Obtain sufficient relevant data to afford a
reasonable basis for conclusions or recommendations in relation
to any professional services performed.
5. PCAOB Auditing Standards. AU Section 325
Communications About Control Deficiencies in an Audit of
Financial Statements.
Application:
Even though the flaw was initially unknown, now that it
has been uncovered, it is LCV’s responsibility to rectify the
issue or report as is, and produce more accurate statements to
present to the bank. Christine should not accept additional work
when she already has other deadlines. Erik and Raoul had no
information regarding a credit agreement of the audit fees
outstanding. Christine should appropriately record company

3. agreements or file them where they are easily accessible.
Accepting the Angel of Music assignment while simultaneously
tackling other pressing deadlines led Christine to carelessly
review the audit plan and miss important information, and
forget to appropriately record the credit agreement. Additional
resources should be sought when similar situations arise.
Conclusion:
Although the flaw in the planning of the audit was
unintentional, now knowing that the flaw existed, Christine and
LCV would not be acting with integrity if they continue to
ignore this flaw. The relevant ethical standard for Christine and
LCV would be to come forward and be open and honest about
the flaw and overlooking this during the planning phase. While
this may hurt the reputation of Christine and LCV, it is better
than covering it up and it coming out down the road which
could really destroy Christine and LCV’s reputation. Due to the
fact that LCV has monetary interest due to outstanding fees that
is owed by Angel of Music, Inc. for work performed, LCV
would be unable to reach an objective audit conclusion
regarding their going concern. We feel that if the bank knew of
the outstanding fees due to Christine and LCV their decision
regarding the amount of money they would be able to borrow
would be reduced or maybe they would not have the financial
standing to borrow the money at all. Because the company is
having financial troubles the bank would probably not put
themselves at risk of losing money.
References
AICPA. Code of Professional Conduct. (2015). Retrieved from
http://www.aicpa.org/Research/Standards/CodeofConduct/Down
loadableDocuments/2014December15ContentAsof2015April23C
odeofConduct.pdf
Public Company Accounting Oversight Board. (2015). American
Institute of Certified Public
Accountants, Inc. Retrieved from

4. http://pcaobus.org/Standards/Auditing/Pages/AU110.aspx
Public Company Accounting Oversight Board. (2015). American
Institute of Certified Public
Accountants, Inc. Retrieved from
http://pcaobus.org/Standards/Auditing/Pages/AU325.aspx
“Audit and Financial Interest”
ACCT 635
Group case 3
Christine is one of three partners in the CPA firm of Leroux,
Chagny, and Valerius (LCV). The firm generates revenues of
about $1.4 million per year. Angel of Music, Inc. is one of
Christine’s clients, which has been very successful since it first
became a client five years ago. Angel of Music has annual
revenues of about $15 million.
Angel of Music generates annual fees for LCV of about
$50,000. About $35,000 of those fees are for audit work, and
the remaining $15,000 is for routine tax calculations and
preparation of the corporate tax returns. LCV has a separate tax
department which performs the tax compliance work for Angel
of Music.
Angel of Music’s financial year end is December. In 2012, the
audit work for 2011 began in June and the audit report was
signed in August. By the end of August, the 2011 tax return
had been submitted and LCV’s invoice was sent to Angel of
Music at the end of August.
In September, 2012, a large customer of Angel of Music
declared bankruptcy, and Angel of Music incurred a large bad

5. debt. The management of Angel of Music approached Christine
immediately and was open about Angel of Music’s short-term
cash flow problem. Christine agreed that payment of LCV’s
$50,000 invoice could be spread over 10 months, beginning in
October, 2012.
Angel of Music also needed the support of its bank. In
December, it began negotiating an increase in its line of credit
at the bank. It is now early March, 2013 and the bank has
requested audited financial statements for 2012 by the end of
the month. The audit is underway, and Christine has promised
Angel of Music that the bank will have the audited financial
statements on time.
The planning of the audit was done by the audit senior, Erik,
and reviewed by the audit manager on this assignment, Raoul.
Christine has a lot of confidence in both, so, due to pressing
deadlines on other work, she did not review the audit plan in
detail before the audit team began the year end audit work.
Christine decides to review and sign off on that section of the
audit file now, in March.
Christine notes that Erik and Raoul have correctly identified
going concern as the area of the audit with the greatest risk.
However, while planning the audit, neither was aware of the
credit agreement reached regarding last year’s fees. Christine
checks LCV’s records and finds that Angel of Music still owes
the firm $25,000 from the audit and taxes for 2011.
There is a flaw in the planning of the audit which was not
noticed by Erik or Raoul before beginning the audit work. Is it
possible to ignore this flaw and act with integrity since the flaw
was unintentional?
Can LCV reach an objective audit conclusion, since LCV would
benefit from Angel of Music’s continued operation so they

6. could pay the outstanding fees?
What are the relevant ethical standards for the auditors?
Regardless of the actual impact of the outstanding debt on
objectivity, if the bank knew of the outstanding fees, what
impact might it have on Christine’s and LCV’s reputations?