Question

Case 08-7:

Data Trappers, Inc. Data Trappers, Inc. (DTI) is an SEC registrant headquartered in Seattle, Washington. DTI delivers security solutions to assist companies in monitoring their systems, managing information security risk, and maintaining robust information security programs. Their computer software offerings encompass network and information security, network operations, cryptography, and privacy, among others.

As a global organization with subsidiaries in 23 countries, DTI is served by more than 2,000 employees worldwide. Sales for the fiscal year ended June 30, 2017 were more than $52 million, which represents an increase of 15% over the prior year.

DTI has been audited for the past eight years by Wilkers & Co. LLC (Wilkers). On July 28, 2017, DTI notified Wilkers that they were going to dismiss them as their auditors. The DTI Audit Committee notified Browne & Thompson LLP (B&T) that they wished to engage them as their new auditors for the year ending June 30, 2018. B&T could not begin any audit procedures until Wilkers completed their procedures related to the filing of the 10-K. Accordingly, Wilkers’ engagement to audit the DTI financial statements ceased when DTI filed the Form 10-K with the SEC on August 29, 2017. At that time, DTI filed a Form 8-K with the SEC naming B&T as the successor auditors to Wilkers. Prior to the filing of the 8-K, B&T and DTI did not complete the new client acceptance procedures. B&T also did not sign an engagement letter with DTI or begin any audit procedures.

During July and August 2017, the Hong Kong office of B&T provided bookkeeping services to a wholly owned subsidiary of DTI in Hong Kong — Data Chips. Data Chips was formed in 2016 and had five employees as of June 30, 2017. Its total assets and income are 1% and 2%, respectively, of DTI’s consolidated total assets and income. Immediately upon learning that B&T was appointed as the new independent auditor, B&T Hong Kong ceased all services to Data Chips. Data Chips then destroyed the results of the bookkeeping services and had an internal accounting staff re-perform all the bookkeeping services originally provided by B&T.

When DTI learned of the bookkeeping services performed in Hong Kong, they contacted eight other accounting firms in an attempt to consider appointing a different firm as their auditor. However, the eight other firms were unable to perform the audit for various reasons. Once the B&T Hong Kong bookkeeping work was destroyed, DTI contacted B&T to inform them that they once again intended to engage B&T as their global external auditor.

Required: Evaluate whether B&T would be permitted to serve as the independent auditor of DTI for the year ending June 30, 2018.

Answer 1

B&T would be permitted to serve as the independent auditor of DTI for the year ending June 30, 2018.

As the work performed by B&T HongKong of the book keeping services to a wholly owned subsidiary of DTI is destroyed and reperformed by internal accounting staff, B&T can give an independent view on financial records of DTI.

Also, proper procedure is followed to dismiss the prior auditors and Form 10-K is filed with SEC and Form 8-K is also filed to give the information regarding appointing B&T as the successor auditors.

B&T can accept the appointment as the independent auditors of DTI.