The Lakeside Company: Case Studies in Auditing
Summary of Introductory Case and Case 1
Introductory Case: A look inside a CPA firm
A. Abernethy and Chapman
1. Began operations in 1969
2. 145 employees
3. Main office in Richmond, Virginia with 3 branches elsewhere in Virginia.
4. In Richmond: 10 partners, 14 managers, 21 seniors, and 42 staff auditors.
5. Tax = 11; advisory services 7; remainder usually focus on accounting and
6. During busy times - may work in other areas.
7. 18 secretaries and other clerical staff.
B. Hiring policies
1. College graduates with major in accounting.
2. Must sit for CPA exam within one year of hire date.
3. Complete 40 hours of CPE per ...view middle of the document...
1. Largest clients
- Small hotel chain
- Group of furniture stores
- Several large car dealerships
- Three local banks
- Local newspapers
- Several Virginia periodicals
- Monthly newsletters to clients and local business leaders
- "We are here to help your business" - cost of $53,000.
Case 1: Analysis of potential audit client
A. Lakeside Company
1. Benjamin Rogers, president.
2. Consumer electronics (mainly audio and video equipment), retailer and
3. Prior auditor: King and Company CPA's
4. A and C audit bank that Lakeside does most of business with.
5. March 1997 first contact made between Lakeside and A & C.
6. June 1, meeting to discuss Lakeside's 1997 audit.
B. Information gathered by Abernethy and Wallace Andrews, audit manager
1. Never had a client in this field.
2. Began 1980 with single store, sold bargain-priced television and stereo
3. Presently have six stores; 3 in Richmond, one each in Charlottesville,
Fredericksburg, and Petersburg.
4. Five stores rented in small shopping centers.
5. Sixth stores built by Lakeside located adjacent to new shopping mall.
6. Also own warehouse with office space.
• Began concentrating on sale of high-end audio and video equipment.
• Sole distributor of Cypress Products for Virginia and N. Carolina.
• Carry Cypress products almost exclusively in stores.
• Cypress not known in Richmond, sales declined initially, but
rebounded in 1995 and 1996.
• All stores suffer from intense competition, some stores failing.
• Six sales representatives visit other audio, electronic, and appliance
• Order can be phoned into Richmond headquarters.
• After credit check, inventory sent and billed, 2/10, n/45.
• Up to 20% of merchandise can be returned within four month as long
as not damaged.
• Historically, returns have been low.
• Distributorship types sales have risen materially in last two years.
• Purchased weekly from Cypress.
90-day terms, but offer large cash discounts for early payment.
Lakeside policy to take all available discounts.
Cover cash needs with lines of credit with two banks - total $750,000,
interest rates floats with an average of 7% to 9% over last few years.
Both banks require a minimum cash balance of 5% of loan balance.
11. Building construction
• Loans with National Insurance Company of Virginia.
• With 9 1/4% interest and 10% interest respectively.
12. Reasons for changing CPA firms.
• Unhappy with services.
• Need help updating accounting system. Outgrowing control features of
• Charging an excessive fee.
• Audit opinion for 1996. The auditors to draw attention to an uncertainty
that was not...