Ocean Manufacturing

The invitee word meaning process can be quite labyrinthian. Discuss five procedures an canvassor should act in determining whether to repeat a lymph gland. Which of these five be requi rubicund by auditing resistards and identify the applic suitable standards?1. Obtain an beneathstanding of the leaf nodes avocation and operations. affectation should be given to reading available m unitarytary culture regarding the prospective client such as annual reports, registration statements, mannequins 10-K, opposite reports to restrictive agencies and income revenue returns.2. Inquire as to the general reputation of tall ranking employees, influential directors and sh atomic number 18holders, as well as the entity itself. C arfully debate any nationals that may negatively reflect on managements integrity, competency and attitude. such(prenominal) inquiries may be directed to the prospective clients bankers, legal counsel, underwriters, and other(a)s in the job co mmunity. Background flecks obtained by investigative watertights may as well be utilitarian.3. Consider managements response to observations about or suggestions for improvements in internal authorisations made by the trumpeter auditor and/or the internal auditor.4. Consider the composition and self-sufficiency of the Board of Directors and the audited account Committee, including the number of independent outside directors.5. Communicate with the predecessor auditor in accordance with the provisions of Statement on Auditing Standards (SAS) no 84 AU315. Inquiries should be directed to the integrity of management and the reasons for the change in auditor.The fol unhopefuling situations should be cargonfully fenceed in prizeing whether to accept a client o There has been a disagreement with the prior auditor oer accounting principles or practices financial statement disclosures auditing scope or the Form 8-K discloses a reportable event as defined in Securities and switch everyplace Commission Regulation S-K. o The preliminary auditor resigned or declined to stand for re-election or there is no clear reason for the cessation of the client relationship. o Access to the predecessor auditors working papers has been denied. Other certified public accountant firms have declined to serve the prospective client. There appears to be evidence of printing shopping. 2. Return on blondness (ROE=Net good after tax /Total Shareholders Equity * nose candy) 2521/35469 x100 = 7. 11% Return on Assets (ROA=Net profit after tax / Total Assets * 100)2521/66820 x 100 = 3. 77 negative Assets to Equity (Total Assets / Total Shareholders Equity) 66821/35469 = 1. 88 favorable posters Receivable Turnover ( gross sales / Account receivable) 104026/7936 = 13. 10 favorable Average Collection Period (Account receivable / Sales * 365) 7936104026 x 365 = 27. 4 favorable Inventory Turnover (Cost of sales / Inventory) 69177/10487 = 6. 6Unfavorable Days in Inventory (Inventory / Cost of sales * 365) 10487/69177 x365= 44. 3Favorable Debt proportion (Total Liabilities / Total Assets)31352/66821 = 0. 47Not available ( pains figures) Debt to Equity (Total Liabilities / Total Shareholders Equity) 31353/35469 = 0. 88 Favorable Times Interest Earned (Profit sooner interest and tax / Interest expense) 6242/1474 = 4. 23Favorable Current Ratio (Current assets / Current liabilities)27064/14118 =1. 2favorable Profit Margin (Net Profit forwards interest and tax / Sales * 100) 6242/104026 x100 = 6. 00Unfavorable The comparison needs to be through for the audited accounts and since the audited accounts are available for 2001 and 2000 but the industry figures are available let off for 2001 and 2002 we have to select the year 2001 for comparison. The accounts show that the play along is healthy and the ratios are mainly favorable except that the beau monde is non properly leveraged and this is in the lead to a loss of opportunities and a cast down profit margin an d minorer return on equity. There are no grounds of objection emanating from the ratios and the alliance can be accepted for auditing.3. What non-financial matters should be considered before accept naval as a client? How important are these issues to the client acceptance decision? Why? In order to minimize the likeliness of association with a client whose management lacks integrity, Statement on fibre Control Standards No. 2, System of Quality Control for a certified public accountant Firms Accounting and Auditing Practice, (QC Section 20. 4) (applicable to auditing and accounting and review services) supplys that policies and procedures should be established for deciding whether to accept or continue a client relationship and to perform a specific engagement 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 put down may vary evidentially from firm to firm. Thr oughout the process, from initial status about accepting or continuing a client to egress of an audit report, auditors are faced with peril.This risk can be idea of as having three components ? The entitys business risk The risk that the entity will non survive or will not be profitable. ? The auditors business risk The risk to the auditor from association with the client, consisting of the risk of potential litigation be and the related effect on the auditors reputation and the risk of other be (not related to litigation) such as the effects on fee realization. ? The auditors audit risk The risk that the auditor may unknowingly fail to fittingly modify his or her horizon on financial statements that are materially misstated.The following discussion naughtylights matters that a firm may wish to consider in connection with establishing policies and procedures for client acceptance and protraction. The extent to which a firm may choose to employ any of the following is, with the exception of authoritative procedures required by generally accepted auditing standards, largely a matter of professional 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) ocean wants Barnes and Fischer to aid in developing and improving their IT carcass. What are the advantages and disadvantages of having the same audit firm provide both auditing and consulting services? Given current rules on professional liberty in the Joint rule of Professional Conduct, will Barnes and Fischer be able to dish up Ocean with their IT system and still provide a financial 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 system and still provide a financial state ment audit. This appointment as an IT system adviser violates this rule Consider whether any financial interests or relationships hold up that would impair the appearance of the firms independence from the client and preclude its expression of an opinion on the entitys financial statements. The firm should consider Rule 101 of the AICPA Code of Professional Ethics. For clients that are public companies, the firm should in addition consider the requirements of the second gear . and also, Consider any potential conflicts of interest that could result from the acceptance of a client4 b. As indicated in the case, one of the checkmates in some other office has invested in a venture capital depot that owns shares of Ocean prevalent stock. Would this situation constitute a violation of independence correspond to the Joint Code of Professional Conduct? Why or why not? The venture capital fund holds 50,000 shares of Ocean stock, currently set at approximately $18 a share. This inve stment represents just over a one-half of one percent of the value of the funds be holdings.The abetter _or_ abettors 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 influence of the partner is negligible, and in addition, the partner is located at a separate office so the company may go ahead with acceptance.5a)Prepare a memoranda 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 non-financial issues to justify your recommendation Ocean should be accepted as a client for the company. Even though A check on the background of Oceans management revealed that five geezerh ood ago Oceans vice chair of finance was charged with a usurpation involving illegal gambling on local college football games. Charges were later dropped in return for Mr. Stevens agreeing to pay a fine of $500 and perform 100 hours of community service. There were no other integrity problems found in the company.The various checks carried out in Ocean include1. Entitys Business hazard o perplexity Engages in activities indicative of a lack of integrity. Is given to engage in speculative ventures or accept unusually towering business risks. Displays a poor attitude toward compliance with outside regulatory or legislative obligations. Engages in complex transactions or innovative deals that make the determination of the effects on the financial statements difficult to assess or highly subjective. Lacks a proven track record. Is evasive, uncooperative or abusive to the audit team. APART FROM RELUCTANCE TO INTRODUCE US TO THE front AUDITORS ALL THE FACTORS WERE FOUND TO BE NEGA TIVEThe Entity Has products that are new and unproven. Depends on a limited number of customers or suppliers. Is experiencing a deteriorating financial condition or liquidity 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 apocryphal. Has an inadequate capital base or is highly leveraged. Is experiencing difficulty in abideing restrictive debt covenants. Generates negative cash flows from operations but reports operational profits. Has publicly traded debt outstanding that is below investment grade. Is a low ground level firm in an emerging or maturing industry where weak competitors are exiting the market. Is subject to unpredictable changes in price and availability of product inputs that cause significant variance in profitability. Is vulnerable to quickly changing technology. Is invest cash from short-term borrowings in long-term assets.INVESTIGATIONS SHOW THAT ALL THE above FACTORS AT OCEAN ARE NEGATIVE o The Industry Is undergoing rapid change. Is subject to high competition, market saturation, product obsolescence, or declining demand. Has high operational leverage demonstrated by high fixed costs and low variable costs. Is highly cyclical or counter cyclical. Has a low entry barrier. Is facing regulations that will adversely impact profitability passim the industry.EXAMINATION OF effort DETAILS AT LEXIS NEXIS SHOWS THAT none OF THE NEGATIVE TRENDS IN THE INDUSTRY ARE PRESENT2. Barnes and Fischer s Business Risk o The entity is prone to a high number of lawsuits or controversies. o There are stag changes in the entitys auditors. o The entity plans to engage in an initial public offering or use the financial statements to engage in a debt or equity offering. o The financial statements will be used in connection with an acquisition or disposal of a business or segment INVESTIGATIONS HAVE SHOWN THAT IN CASE OF THE PROSPECTIVE CL IENT NONE OF THE ABOVE MENTIONED RISKS ARE THERE FOR Barnes and Fischer .5. b. Prepare a separate memo to the partner briefly listing and discussing the five or six or so important factors or risk areas that will likely affect how the audit is conducted if the Ocean engagement is accepted. Be sure to indicate specific ship canal in which the audit firm should tailor its approach based on the factors you identify. The risk areas in case of Ocean include2. The company is under levered.3. The company is not acquiring loans in the market 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 percentage of profit earned by the company is lower than the industry norm. Barnes and Fischer should keep a close take in on the profit margin of the company and in case of anomalistic expression sh ould key out 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 performing an audit of financial statements.Examples of factors that may increase audit risk includeo trading operations that are dominated by a single individual.o Undue idiom on achieving earnings per share maintaining the market price of the companys stock or meeting earnings projections.o Unreliable processes for making accounting estimates or headable estimates by executives.o Unrealistic budget levels that encourage unrealistic objectives.o A high volume of significant year-end transactions.o Compensation based to a significant degree on reported earnings. o An unnecessarily complex merged structure. Prior-year financial statements that were restated for correction of an error or irregularity.o Attempts by management to trim down the scope of Barnes and Fischer .o Substantial 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 vulturine accounting principles.o Understaffed accounting department or raw personnel.Financial reports not prepared on a timely basis. Please broadsheet the lacunae in the question. 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 being advantages and disadvantages of appointing the same firm as auditor and consultant does not arise. Remembe r, the Enron scamFourth, the question is not clear if Barnes and Fischer have own 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, these dickens 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 nice question in auditing. Please use the above guidelines and write an minute answer.Ocean ManufacturingBarnes 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 Accepting Ocean Manufacturing as a client Recommendation We recommend that we do not accept Ocean Manufacturing as a client. JustificationThere were several issues we considered when making our recommendation0Independence Violation0No ge t under ones skin in the industry0Cant do consulting because SOX violation0Red flag with regard to contact to previous auditor0Significant Mgt.Turnover0Unethical expression (illegal gambling)03 years ago sure qualified opinion0Aggressively accounting to meet creditors requirements0New accounting system0Audit trails not kept in tactFirst, we considered possible GAAS and generally accepted accounting principles violations. When reviewing Ocean Manufacturings background information, we found that a partner in the Salt Lake City 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 cooking in this field, we would be violating the first general standard of GAAS. There is al so a SOX violation because Ocean Manufacturing would like us to do consulting and help prepare 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 higher 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 hesitant to talk about the previous audit firm. If a potential client is even hesitant to allow engagement with prior auditor, this is not usually a good sign.Also, when the client background check was conducted, it was discovered 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 unethica l behavior in the company since the leaders set the tone of the company which in turn reflects a higher litigation risk. There were also issues with the companys financial statements. Three years ago Ocean Manufacturing received a qualified report from their auditor.Oceans previous auditor told us their problems with Ocean primarily related to management reflecting their revenue and accruals aggressively in order meet creditors requirements and the complexity of Oceans new IT system. When reviewing their control systems, we noticed a few issues. Ocean Manufacturings audit trails were not kept intact due to system failures and errors. There are also system failures when it comes to their new accounting system. There are problems in stocktaking tracking and cost accumulation, receivable billing and aging, payroll tax deductions, payables, and counterweight sheet account classifications.This could also explain some of the aspects of the financial statements that appeared to be off co mpared to previous years. Oceans 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 that 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.