a.

The bank decided that the assurances provided by a review were needed before a loan could be approved, but an audit was not necessary. A review includes a public accounting firm performing financial procedures and dealing about the fair presentation of the statements. Because, the auditors can often identify incorrect presentations in the financial statements that have been overlooked by the accountant for the company. The bank probably did not require an audit because the benefit was smaller than cost. In many cases, the decision as to whether to have a review or an audit is negotiated between the company seeking a loan and the bank loan officer. Both the company and the bank have options in negotiating such things as the amount of the loan, the rate of interest, and whether to require an audit or a review. The bank can reject the loan request and the company can go to other banks that want to make loans. Banks have some preferred public accounting firms in which they have considerable confidence due to their reputation in the community or past work they have done for other bank customers.

b. Because the amount of the loans from the bank to Ritter increased, the bank probably wanted additional assurance about the reliability of the financial statements. It is also likely that Rene Ritter negotiated the one percent reduction of the interest rate by offering to have an audit instead of a review. A one percent reduction in the interest rate saves Ritter $30,000 annually compared to the $5,000 additional fee for an audit.
c.

Rene referred to the public accounting firm as partners in a professional sense, not a business sense. The firm had provided many consulting and tax services, as well as providing review and audit services over the entire business life of the company. Rene recognised that these professional services had contributed to the success of the business and she chose to acknowledge those contributions during her retirement comment. Assuming that the firm retained an attitude of independence throughout all audits and reviews, no violation of professional independence occurred. As the external auditor, the firm of Wallace & Fineberg provide the shareholders, creditors and management an independent opinion as to the fair presentation of the financial statements. Given the potential biases present when management prepares the financial statements, the shareholders and creditors must consider the potential for information risk that might be present. The independent audit conducted by Wallace & Fineberg helps shareholders and creditors reduce their information risk.

d.

Management also benefits by having the external auditors independently assess the financial statements even though those statements are prepared by management. Due to the complexities involved in preparing financial statements in accordance with accounting

standards, the potential for error on the part of management increases the need for an objective examination of those financial statements by a qualified independent party. e. The auditor is responsible for obtaining reasonable assurance that material misstatements are detected, whether those misstatements are due to errors and/or fraud. To obtain reasonable assurance, the auditor is required to gather sufficient, appropriate evidence. The auditors chief responsibility to shareholders, creditors and management is to conduct the audit in accordance with auditing standards in order to fulfil their responsibilities of the engagement.