Katrina Ellis is the engagement partner of the audit of

Katrina Ellis is the engagement partner of the audit of Champion Securities, an investment company. Most of Champion’s assets and liabilities are financial and their valuation is critical to the assessment of the company’s and profitability. Katrina has employed two outside experts to value the financial assets and liabilities because they are extremely complex to value, particularly the energy market derivatives and the instruments traded in foreign markets. In addition, the valuations are highly dependent on market conditions and the specific and detailed requirements of the recently revised accounting standards.

Throughout this year’s audit, Katrina has had difficulties with the CEO of Champion Securities. He is vehemently opposed to any asset write-downs she has suggested. The CEO has the backing of the chairman of the board, and Katrina has been unable to get the CEO to agree with her concerns about the valuations of the financial assets and liabilities the company has made. In past years, Katrina has had an amicable relationship with both the CEO and the chairman, and the audits have run very smoothly. Katrina now realizes that this harmonious relationship was mainly due to the boom in the market. It was unlikely there would be arguments about writing up the value of the company’s assets during these good times.

Katrina, with the help of the experts, has prepared a summary of the relevant items, detailing the revised values for the assets and liabilities and the associated effects on income and retained earnings. The CEO has dismissed this summary and the audit recommendations with the comment, “The market has hit the bottom and is recovering. There is no need to show these write-downs because by the time the are published, the values will be back to where they were before the market fell. It is all a waste of time. In fact, I think you are just being difficult. I think we need an auditor who is a bit more realistic.”

Required

a. Katrina has planned a meeting with the audit committee of the board of directors. Draft a report that she would discuss with the audit committee.

b. Katrina is also drafting the management representation letter that the CEO will need to sign. If he refuses to sign the letter, discuss the implications for the audit.

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