5(a) Prepare a memo to the partner making 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 consideration of reasons both for and against acceptance and be sure to address both financial and nonfinancial issues to justify your recommendation.
Subject: Ocean Manufactory Should be Accepted
February 3, 2012
Ocean Manufacturing, a medium-sized manufacturer of small home appliances, is our prospective client. First, we should decide whether to accept this client. The purpose is to minimize the likelihood that our auditors will be associated with clients who lack integrity. We can reduce the risk that material misstatements may exist and not be detected by the author. Therefore, we need to investigate the client and obtain certain information that we need. The first step to evaluate the client is to confer with the predecessor auditor. The client granted me permission to contact the previous auditor and he indicated the problems the firm had with Ocean: (1) complexities and problems with Ocean’s new IT system
(2) management’s tendency to aggressively reflect year-end accruals in order to meet creditors’ requirements As far as we know the company switched to a new system in 2011 and the transition to the system was not well managed. The company was working to modify the system to make it better. Also, our local office’s IT team is fairly confident they will be able to diagnose Ocean’s control weakness and help Ocean overcome current difficulties. Therefore, the system is not an obstacle for our firm to accept the client. To meet creditors’ requirements, the management inappropriately reflected year-end accruals. The information reflected on the integrity of management, which might be a risk for us to accept the client. According to the...
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