Case 8-38

8- 38 ( Objectives 8- 2, 8- 3, 8- 4)

Winston Black was an audit partner in the firm of Henson, Davis & Company. He was in the process of reviewing the audit files for the audit of a new client,McMullan Resources. McMullan was in the business of heavy construction. Black was conducting his first review after the audit was substantially complete. Normally, he would have done an initial reviewduring the planning phase as required by his firm’s policies; however, he had been overwhelmed by an emergency with his largest and most important client. He rationalized not reviewing audit planninginformation because ( 1) the audit was being overseen by Sarah Beale, a manager in whom he had confidence, and ( 2) he could “ recover” from any problems during his end- of- audit review. Now, Blackfound that he was confronted with a couple of problems. First, he found that the firm may have accepted McMullan without complying with its new- client acceptance procedures. McMullan came to Henson,Davis on a recommendation from a friend of Black’s. Black got “ credit” for the new business, which was important to him because it would affect his compensation from the firm. Because Black was busy,he told Beale to conduct a new- client acceptance review and let him know if there were any problems. He never heard from Beale and assumed everything was okay. In reviewing Beale’s preaudit planningdocumentation, he saw a check mark in the box “ Contact prior auditors” but found no details indicating what was done. When he asked Beale about this, she responded with the following: “ I calledGardner Smith [ the responsible partner with McMullan’s prior audit firm] and left a voicemail message for him. He never returned my call. I talked to Ted McMullan about the change, and he told me that heinformed Gardner about the change and that Gardner said, “ Fine, I’ll help in any way I can.” Ted said Gardner sent over copies of analyses of fixed assets and equity accounts, which Ted gave to me....