I need help with writing an engagement letter on behalf of the audit partner, Scott Payne, CPA, for the annual year-end audit of RPC. Assume that the project fee for the audit will be $50,000. Be sure to mention any relevant regulation requirements in your letter, and address the letter to appropriate RPC personnel.
MUST INCLUDE REFERENCES – PLEASE HAVE KNOWLEDGE ABOUT THE SUBJECT
ENGAGEMENT LETTER NEEDS TO ADDRESS:
- Discuss the application of audit theory, GAAS, and a professional code of practice in conducting an audit.
Students should develop an engagement letter to include the following:
- The objectives of the engagement: For example, for a financial statement audit, the objective is to express an opinion on the financial statements.
- Responsibilities of management: These can vary based on the terms and conditions of the engagement. For example, the financial statements and the proper application of generally accepted accounting principles are the responsibility of management.
- Responsibilities of the auditor: These also vary. For a financial statement audit, one responsibility is that you conduct the audit in accordance with GAAS.
- Limitations of the engagement: You should address the fact that the audit is meant to provide reasonable assurance regarding whether the financial statements are free of material misstatements. However, because you don’t examine all transactions, there is a risk that material errors, fraud, or illegal acts exist and aren’t detected.
- Hiring restriction: A general engagement letter condition is that the client won’t try to hire anyone on the current audit team. Usually there’s a required, 1-year cooling-off period between working on a client audit and accepting a position with that company.
PLEASE DO NOT ACCEPT IF YOU DO NOT UNDERSTAND OR CANNOT MEET DEADLINE
BACKGROUND INFORMATION ON COMPANY:
The audit plan begins with accepting the client and ends with the issues of the report and includes any relevant management memos. The following are steps that are included in the audit plan:
- Accepting client and performing initial audit planning
- Understanding the client’s business and industry
- Assessing the client’s risk
- Performing preliminary analytical procedures
- Setting materiality and assessing acceptable audit risk and inherent risk
- Understanding internal control and assessing control risk
- Gathering information to assess fraud risks
- Developing an overall audit plan and audit program
The audit plan (all assignments) will be based on the following scenario.
You are a senior auditor assigned to the team performing an audit for Restorative Pharmaceutical Corporation (RPC), a 10-year-old publicly held corporation listed on the New York Stock Exchange (NYSE), which specializes in anti-aging products such as vitamins, protein-infused beverages, and dietary supplements. RPC’s corporate office is located in San Diego, CA. Its annual sales are approximately $100 million. Restorative’s products have been endorsed by noted doctors and talk show hosts on daytime network television. Restorative also develops and markets products through television commercials, drawing clients to their Web site to accomplish direct sales as well as via major drugstore chains. None of Restorative’s products are FDA-approved, as these are part of a class of products which do not require approval to be marketed in the United States. However, the products are subject to scrutiny when claims regarding various outcomes are assured for clients; general product safety is critical. Products are manufactured primarily in Tijuana, Mexico and are imported for distribution from the main warehouse in National City, CA which is between the corporate office and the manufacturing plant. Your team lead and senior audit manager and firm partner, Scott Payne, CPA, has recruited you to write the engagement letter for the year-end audit of Restorative Pharmaceutical. In addition, he believes it is time for you to begin writing an audit plan under his supervision.
Week 1 Deliverable
The engagement letter is one of the first official deliverables in the audit-planning process. It clarifies the responsibilities and expectations of each party (i.e., the client and the CPA firm) and this is an important element of managing engagement risk, especially the risk related to litigation. The engagement letter includes the acknowledgment of expectations for both the client and the CPA firm conducting the engagement.
Restorative Pharmaceutical Corporation (RPC), a 10-year-old publicly held corporation listed on the NYSE which specializes in anti-aging products such as vitamins, protein infused beverages, and dietary supplements. RPC’s corporate office is located in San Diego, CA.