'Ocean Manufacturing\r'

'The node receiveance process keister be quite entangled. Discuss cardinal procedures an attendee should perform in find out whether to aim a customer. Which of these volt ar requi rosy by scrutinizeing standards and identify the relevant standards?1. Obtain an down the stairsstanding of the knobs production line and operations. friendliness should be given to reading acquir sufficient pecuniary information regarding the prospective node such(prenominal) as annual business relationships, registration statements, variety shows 10-K, other reports to regulatory agencies and income levy issues.2. demand as to the world-wide reputation of spicy ranking draftees, influential directors and shargonholders, as intumesce as the entity itself. C arfully consider round(prenominal) matters that may negatively reflect on watchfulnesss wiz, ability and attitude. Such inquiries may be directed to the prospective lymph nodes bankers, legal counsel, underwriters, and others in the business community. Background covers obtained by inquiring theaters may as well be useful.3. cogitate managements response to observations about or suggestions for improvements in inhering controls made by the fore surpassner collide wither and/or the internal attender.4. as genuine the com base and autonomy of the Board of Directors and the locoweedvass Committee, including the number of independent outside(a) directors.5. excrete with the forerunner scrutiniseor in compliance with the provisions of teaching on take stocking Standards (SAS) no 84 [AU315]. Inquiries should be directed to the integrity of management and the reasons for the change in he arr.The pastime situations should be c arfully considered in assessing whether to accept a client: o thither has been a disagreement with the preceding take stockor all over chronicle principles or practices; fiscal statement disclosures; auditing scope; or the Form 8-K discloses a repor table as yett as defined in Securities and Exchange outfit Regulation S-K. o The previous he ber resigned or declined to stand for re-election or in that respect is no clear reason for the extent of the client relationship. o Access to the predecessor auditors die harding papers has been denied. Other certified existence accountant squares deport declined to serve the prospective client. in that location emerges to be evidence of â€Å"opinion shopping. â€Å"2. go on loveliness (ROE= solve pay after tax / conglomeration Shareholders Equity * 100) 2521/35469 x100 = 7. 11% Return on Assets (ROA=Net gain ground after tax / replete(p) Assets * 100)2521/66820 x 100 = 3. 77   critical Assets to Equity (Total Assets / Total Shareholders Equity) 66821/35469 = 1. 88   approbative Accounts Receivable Turnover (Sales / Account receivable) 104026/7936 = 13. 10 gold Average Collection stopover (Account receivable / Sales * 365) 7936104026 x 365 = 27. 4 favorable Inventory Turnover (Cost of gross revenue / Inventory) 69177/10487 = 6. 6  Unfavorable Days in Inventory (Inventory / Cost of sales * 365) 10487/69177 x365= 44. 3  Favorable Debt Ratio (Total Liabilities / Total Assets)31352/66821 = 0. 47  no(prenominal) available (industry figures) Debt to Equity (Total Liabilities / Total Shareholders Equity) 31353/35469 = 0. 88 Favorable Times stakes Earned (Profit in the beginning pastime and tax / Interest expense) 6242/1474 = 4. 23  Favorable up-to-the-minute Ratio (Current assets / Current liabilities)27064/14118 =1. 2  favorable Profit Margin (Net Profit so nonpareilr interest and tax / Sales * 100) 6242/104026 x100 = 6. 00Unfavorable The analogy needs to be done for the audited accounts and since the audited accounts are available for 2001 and 2000 but the industry figures are available only for 2001 and 2002 we thrust to postulate the year 2001 for comparison. The accounts show that the comp any(prenom inal) is level-headed and the ratios are mainly favorable barely that the political party is not properly leveraged and this is prima(p) to a loss of opportunities and a pass up profit margin and lower recurrence on justness. at that place are no grounds of objection emanating from the ratios and the friendship basin be received for auditing.3. What non- monetary matters should be considered before accepting maritime as a client? How cardinal are these issues to the client credence decision? Why? In order to minimize the give carelihood of tie beam with a client whose management insufficiencys integrity, Statement on Quality Control Standards No. 2, System of Quality Control for a CPA Firms Accounting and inspecting Practice, (QC scratch 20. 4) (applicable to auditing and news report and review services) provides that â€Å"policies and procedures should be accomplished for deciding whether to accept or continue a client relationship and to perform a special betrothal for that client (QC Section 20. 14)”, to minimize the likelihood of the specific policies and procedures established and the nature and extent to which they may be documented may vary authoritatively from firm to firm. Throughout the process, from initial favor about accepting or proceed a client to issuance of an audit report, auditors are faced with endangerment of infection.This insecurity can be thought of as having trey components: ? The entitys business risk †The risk that the entity entrust not survive or leave alone not be profitable. ? The auditors business risk †The risk to the auditor from association with the client, consisting of the risk of potential judicial proceeding costs and the tie in effect on the auditors reputation and the risk of other costs (not connect to litigation) such as the effects on requital realization. ? The auditors audit risk †The risk that the auditor may unknowingly fail to fitly modify his or her opi nion on pecuniary statements that are materially misstated.The sideline discussion heightslights matters that a firm may wish to consider in confederacy with establishing policies and procedures for client acceptance and continuance. The extent to which a firm may choose to mesh any of the following is, with the exception of certain procedures required by generally accepted auditing standards, largely a matter of master judgment. The discussion of specific policies and procedures is intended to be thought-provoking and useful to a firm in assessing the particular client acceptance and continuance policies and procedures it may choose to employ in its practice.4a) marine wants Barnes and Fischer to aid in developing and improving their IT placement. What are the advantages and disadvantages of having the equal audit firm provide some(prenominal) auditing and consulting services? Given sure rules on professional independence in the joint Code of Professional endure, give Barnes and Fischer be able to help maritime with their IT governing body and still provide a fiscal statement audit?No, given the current rules on professional independence in the Joint Code of Professional Conduct, Barnes and fisher will not be able to help ocean with heir IT arrangement and still provide a pecuniary statement audit. This appointment as an IT system consultant violates this rule: â€Å"Consider whether any financial interests or relationships exist that would de musical theme the appearance of the firms independence from the client and obviate its expression of an opinion on the entitys financial statements. The firm should consider Rule one hundred one of the AICPA Code of Professional Ethics. For clients that are frequent companies, the firm should also consider the requirements of the endorsement â€Å". and also, Consider any potential conflicts of interest that could result from the acceptance of a client”4 b. As indicated in the vitrine, one of the partners in another office has invested in a punt capital storehouse that owns shares of maritime vulgar stock. Would this situation take shape a violation of independence fit to the Joint Code of Professional Conduct? Why or wherefore not? The venture capital monetary fund holds 50,000 shares of Ocean stock, currently honourd at more or less $18 a share. This investment represents scarcely over a half of one percent of the value of the funds hail holdings.The partners total investment in the mutual fund is currently valued at about $56,000. Since, the value of the investment represents just over one half percent of the value of the funds total holdings, the figure out of the partner is negligible, and in addition, the partner is located at a separate office so the order may go ahead with acceptance.5a)   unsex a memorandum to the partner fashioning a recommendation as to whether Barnes and Fischer should or should not accept Ocean Manufacturing, Inc as an audit client. Carefully justify your position in light of the information in the case.Include shape of reasons both for and against acceptance and be sure to address both financial and non-financial issues to justify your recommendation Ocean should be accepted as a client for the familiarity. Even though: A check on the background of Oceans management revealed that quin years pastne Oceans vice electric chair of finance was charged with a rape involving illegal frolic on local anaesthetic college football games. Charges were later dropped in return for Mr. Stevens agreeing to pay a fine of $ viosterol and perform 100 hours of community service. thither were no other integrity problems piece in the company.The mixed checks carried out in Ocean include:1. Entitys Business venture o Management:†Engages in activities declarative mood of a lack of integrity.†Is prone to engage in speculative ventures or accept unusually advanced business risks.†Display s a poor attitude toward compliance with outside regulatory or legislative obligations.†Engages in complex transactions or ripe deals that make the determination of the effects on the financial statements difficult to assess or highly subjective.†Lacks a proven bring in record. Is evasive, uncooperative or abusive to the audit team.†APART FROM RELUCTANCE TO INTRODUCE US TO THE PREVIOUS AUDITORS ALL THE FACTORS WERE FOUND TO BE NEGATIVEThe Entity:†Has products that are new and unproven.†Depends on a limited number of customers or suppliers.†Is experiencing a deteriorating financial condition or fluidness crisis.†Is subject to uncertainties that raise substantial doubt about its ability to continue as a going concern.†Operates in countries where business practices are interrogativeable.†Has an inadequate capital base or is highly leveraged.†Is experiencing difficulty in come across restrictive debt covenants.†Generates negat ive gold flows from operations but reports operating(a) profits.†Has in the public eye(predicate)ally traded debt outstanding that is below investment grade.†Is a low tier firm in an emerging or maturing industry where washed-out competitors are exiting the trade.†Is subject to unpredictable changes in price and availability of product inputs that set significant variance in positivity.†Is under fire(predicate) to rapidly changing technology.†Is investing coin from short-term borrowings in long-term assets.INVESTIGATIONS convey THAT ALL THE ABOVE FACTORS AT nautical ARE NEGATIVE o The industry:†Is undergoing rapid change.†Is subject to high competition, commercialize saturation, product obsolescence, or declining demand.†Has high operating leverage demonstrated by high fixed costs and low uncertain costs.†Is highly cyclical or prognosticate cyclical.†Has a low entry barrier.†Is confront regulations that will adve rsely impact profitability throughout the industry.EXAMINATION OF constancy DETAILS AT LEXIS NEXIS SHOWS THAT NONE OF THE NEGATIVE TRENDS IN THE INDUSTRY ARE PRESENT2. Barnes and Fischer ‘s Business venture o The entity is prone to a high number of lawsuits or controversies. o in that location are frequent changes in the entitys auditors. o The entity plans to engage in an initial public adduceing or use the financial statements to engage in a debt or equity offering. o The financial statements will be used in data link with an acquisition or disposal of a business or segment INVESTIGATIONS shake up SHOWN THAT IN CASE OF THE PROSPECTIVE invitee NONE OF THE ABOVE MENTIONED RISKS ARE at that place FOR Barnes and Fischer .5. b. Prepare a separate memo to the partner briefly listing and discussing the five or six most important factors or risk areas that will in all probability affect how the audit is conducted if the Ocean engagement is accepted. Be sure to indicate spec ific ways in which the audit firm should tailor its approach based on the factors you identify. The risk areas in case of Ocean include;2. The company is under levered.3. The company is not getting loans in the marketplace because of disrepute not know to us.4. There might be integrity issues related to the vice- president involved in gambling but kept underground and secret. The Barnes and Fischer should be vigilant on the activities of the main executives of Ocean.5. The plowshare of profit earned by the company is lower than the industry norm. Barnes and Fischer should keep a close watch on the profit margin of the company and in case of anomalistic behavior should mention it in the auditors report Barnes and Fischer should follow SAS No. 47, as amended, Audit Risk and Materiality in Conducting an Audit (AU Section 312), which provides guidance on the auditors consideration of audit risk when planning and playacting an audit of financial statements.Examples of factors that ma y cast up audit risk include:o Operations that are dominated by a single individual.o Undue violence on achieving earnings per share; maintaining the market price of the companys stock; or meeting earnings projections.o Unreliable processes for do be estimates or oppugnable estimates by executives.o surrealistic budget levels that encourage unrealistic objectives.o A high volume of significant closing transactions.o Compensation based to a significant degree on reported earnings. o An unnecessarily complex corporate structure. Prior-year financial statements that were restated for correction of an error or irregularity.o Attempts by management to reduce the scope of Barnes and Fischer .o meaty litigation involving the entitys business practices.o Material weaknesses or other reportable conditions in the internal control structure.o Significant and unusually complex related party transactions. o Affiliates that are unaudited or audited by others.o Management espouses battlef ul accounting principles.o Understaffed accounting subdivision or in insured personnel.Financial reports not alert on a timely basis. enthrall note the lacunae in the enquire. First, the question does not mention the weights Barnes and Fischer intend to give financial measure and non-financial measures for accepting Ocean as the client. Second, the question does not mention what influence the partner in the ‘other office has in the auditing of Barnes and Fischer. This is related to the policies of the auditors. Third, the question of there organism advantages and disadvantages of appointing the same firm as auditor and consultant does not arise. Remember, the Enron scam!Fourth, the question is not clear if Barnes and Fischer suffer experience of auditing accounts of firms making small home appliances. Fifth, the question mention in one place that Ocean wants to make a public issue, on the other hand the company accounts are showing that the company is under leveraged, the se two things are antithetical and Barnes and Fischer should have investigated why Ocean wants to go in for equity when Ocean should actually go in for debt. Still this is an excellent question in auditing. Please use the to a high place guidelines and write an excellent answer.\r\nOcean Manufacturing\r\nBarnes and Fischer, LLP| To:| Jane hunter| From:| Susan Anderson, Elizabeth Lane, Chantal Murphy, Elizabeth Robinson| CC:| Dr. Cashell| Date:| 3/5/2013| Re:| Decision on pass judgment Ocean Manufacturing as a client| | Recommendation: We recommend that we do not accept Ocean Manufacturing as a client. Justification:There were several issues we considered when making our recommendation:0Independence Violation0No experience in the industry0Can’t do consulting because SOX violation0Red flag with regard to finish off to previous auditor0Significant Mgt.Turnover0Unethical behavior (illegal gambling)03 years ago received sufficient opinion0Aggressively accounting to meet credi tor’s requirements0New accounting system0Audit trails not kept in tactFirst, we considered possible GAAS and GAAP violations. When reviewing Ocean Manufacturing’s background information, we found that a partner in the Salt Lake urban center office owns shares in a venture fund which holds a private equity investment in Ocean common stock. This is an independence violation which goes against the second general standard of GAAS.Another GAAS violation could be considered because we have a background in the healthcare service industry and Ocean Manufacturing is in the appliance industry. Since we do not have training in this field, we would be violating the introductory general standard of GAAS. There is also a SOX violation because Ocean Manufacturing would like us to do consulting and help bushel for the IPO. They also would like us to work with their IT program. This goes against the rules of GAAP.Since they are getting ready to offer an IPO we would be faced with h igher litigation risk. Ocean Manufacturing also has various management issues that have raised red flags. The company has experienced high management turnover, which could be an indication of how the company is run on a daily basis. When the vice-president of Ocean was approached to discuss the previous auditor, he was hesitating to talk about the previous audit firm. If a potential client is even hesitant to allow engagement with introductory auditor, this is not usually a beneficial sign.Also, when the client background check was conducted, it was sight that the vice-president of finance was involved with illegal gambling in the past, which could be an indication of his lack of ethics. This behavior could carry over to wrong behavior in the company since the leading set the tone of the company which in turn reflects a higher litigation risk. There were also issues with the company’s financial statements. Three years ago Ocean Manufacturing received a qualified report f rom their auditor.Ocean’s previous auditor told us their problems with Ocean primarily related to management reflecting their revenue and accruals war-riddenly in order meet creditors’ requirements and the complexity of Ocean’s new IT system. When reviewing their control systems, we notice a few issues. Ocean Manufacturing’s audit trails were not kept sacrosanct due to system failures and errors. There are also system failures when it comes to their new accounting system. There are problems in armory tracking and cost accumulation, receivable charge and aging, payroll tax deductions, payables, and balance canvass account classifications.This could also explain some of the aspects of the financial statements that appeared to be off compared to previous years. Ocean’s accounts receivable, accounts payable, and accrued expenses appear to be much greater than the changes in the year before. This could also be because of the aggressive accruing tha t was discussed earlier. In conclusion, we feel that the issues with auditing standards, management, and financial statements are good enough indications as to why we should not accept Ocean Manufacturing as a client. |\r\n'