Auditing P 6-31
Rene Ritter opened a small grocery and related-products convenience
store in 1987 with money she had saved working as an A&P store
manager. She named it Ritter Dairy and Fruits. Because of the excellent
location and her fine management skills, Ritter Dairy and Fruits grew to
three locations by 1992. By that time, she needed additional capital.
She obtained financing through a local bank at 2 percent above prime,
under the condition that she submit quarterly financial statements
reviewed by a CPA firm approved by the bank. After interviewing several
firms, she decided to use the firm of Gonzalez & Fineberg CPAs,
after obtaining approval from the bank.
In 1996, the company had grown to six stores, and Rene developed a
business plan to add another 10 stores in the next several years.
Ritter's capital needs had also grown, so Rene decided to add two
business partners who both had considerable capital and some expertise
in convenience stores. After further discussions with the bank and
continued conversations with the future business partners, she decided
to have an annual audit and quarterly review don by Gonzalez &
Fineberg, even though the additional cost was almost $15,000 annually.
The bank agreed to reduce the interest rate on the $4,000,000 of loans
to 1 percent above prime.
By 2001, things were going smoothly, with the two business partners
heavily involved in day-to-day operations and the company adding two new
stores each year. The company was growing steadily and was more
profitable than they had expected. By the end of 2002, one of the
business partners, Fred Worm, had taken over responsibility for
accounting and finance operations, as well as some marketing. Annually,
Gonzalez & Fineberg did an in-depth review of the accounting system,
including internal controls, and reported their conclusions and
recommendations to the board of directors. Specialists in the firm
provided tax and other advice. The other partner, Ben Gold, managed most
of the stores and was primarily responsible for building new stores.
Rene was president and manages four stores.
In 2006, the three partners decided to go public to enable them to add
more stores and modernize existing ones. The public offering was a major
success, resulting in $25 million in new capital and nearly 1,000
shareholders. Ritter Dairy and Fruits added stores rapidly under the
three managers, and the company remained highly profitable under the
leadership of Ritter, Worm, and Gold.
Rene retired in 2009 after a highly successful career. During the
retirement celebration, she thanked her business partners, employees,
and customers. She also added a special thanks to the bank management
for their outstanding service and to Gonzalez & Fineberg for being
partners in the best and most professional sense of the word. She
mentioned their integrity, commitment, high-quality service in
performing their audits and reviews, and considerable tax and business
advice for more than two decades.
Required:
a. Explain why the bank imposed a requirement of a quarterly review of
the financial statements as a condition of obtaining the loan at 2
percent above prime. Also explain why the bank didn't require an audit
and why the bank demanded the right to approve which CPA firm was
engaged.
b. Explain why Ritter Dairy and Fruits agreed to have an audit
performed rather than a review, considering the additional annual cost
of $15,000.
c. What did Rene mean when she referred to Gonzalez & Fineberg as partners? Does the CPA firm have an independence problem?
d. What benefit does Gonzalez & Fineberg provide to stockholders,
creditors, and management in performing the audit and related services?
e. What are the responsibilities of the CPA firm to stockholders, creditors, management, and other users?
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