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National Student Marketing

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1. Identify quality control procedures for accounting firms that might have resulted in Peat Marwick avoiding the problems it experienced on the NSMC engagements. Do accounting firms presently employ these procedures?

Peat Marwick should have asked Arthur Anderson of the reason why they resigned the audit of NSMC. Instead of asking "the question" they asked them "whether there was any reason it should not accept NSMC as an audit client." And they relied that there were not aware of a reason to deny NSMC as an audit client. Because of this they engaged in the audit.

Accounting firms presently employ this procedure in order to find out the truth of what the reason for the resignation of the predecessor was all about. This gives an audit firm an idea of what has undergone and can be one criteria of choosing the audit client. By asking the predecessor why they left the audit client they have insurance if the predecessor deceives them into thinking there was nothing wrong. Usually you don't find an audit firm not partaking a audit cause there was nothing wrong; audit firms do not just give up on audits for other firms to take.

2. Do you believe that Arthur Anderson had a professional or moral responsibility to inform Peat Marwick why it resigned as NSMC's audit firm. Defend your answer. (Recognize that SAS No. 84. "Communications between Predecessor and Successor Auditors," was not in effect in the late 1960's.)

I believe that Arthur Anderson Had the professional and moral responsibility to in form Peat Marwick of the possible outcome that may occur during such audit. Arthur Anderson is a professional and when someone comes up to you asking for information about a company that you are familiar with you tell him the whole story, the truth. Arthur Anderson was asked if there should be a reason for them not to accept. However, the reason for the leave of Arthur Anderson was due to the fact that they were questioning the information brought to them by the executives of NSMC. That is a serious accusation from Arthur Anderson that should aware firms thinking of entering the audit. Arthur Anderson should be partly responsible for being a partial factor into taking the audit.

3. Identify the key audit risk factors that Peat Marwick faced during the 1968 NSMC audit. What measures could Peat Marwick have taken to control or minimize the audit risk posed by these factors?

Peat Marwick had suspicions of the audit in question and still decided to take the audit. When questioning a factor, one shouldn't take the audit because it brings revenue. Everyone is looking at things short term and not knowing the outcome of their actions. Peat Marwick had decided to go against those suspicions and took the audit. One must have guidelines to go over in order to check and see whether to take the audit or not. We see that Peat Marwick had no policy of what should be done and since that was the case he had nothing to go with to see if the company should be taken as the audit client.

4. Briefly describe the responsibilities a CPA assumes, under existing professional standards, when he or she is "associated" with unaudited financial data.

The responsibility that a CPA assumes, under existing professional standards is the risk that is assumed to be given when your name is associated with unaudited financial data. When people see your name on a report even though you haven't audited the company, they tend to think that you are in agreement with the financial data. This is what CPA firms must consider when being associated with a companies financial data. This is important to CPA firms, since litigation can be presumed to happen. If an audit firm found the discovery of an error that was material they will be responsible to insist the revision of that data.

5. What factor or factors may explain why Touche Ross reached a different conclusion that Peat Marwick regarding the appropriate accounting treatment for NSMC's fixed-fee promotional projects?

The factors that explain why Touche Ross reached a different conclusion than Peat Marwick regarding the appropriate accounting treatment for NSMC's fixed fee promotional projects is due to the fact that any project considered could be canceled by NSMC's clients. If that's the case, then NSMC can expense projects that were canceled under the percentage of completion method, by writing off the receivables. That is why Touche Ross concluded that completed-contract method would be appropriate for NSMC. If they did not contract with the clients then they did not recognize the amount earned in revenue prior to contract, which was the amount that reported the most earnings.

6. In your



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