Ocean Manufacturing

The node espousal process can be quite complex. Discuss five procedures an attendee should perform in determining whether to accept a lymph node. Which of these five ar required by visiting standards and depict the applicable standards?1. Obtain an understanding of the clients cargon and operations. makeation should be given to reading accessible pecuniary information wishinging the prospective client such as annual reports, registration statements, Forms 10-K, other reports to regulatory agencies and income impose re suits.2. Inquire as to the general reputation of high ranking employees, influential directors and shareholders, as well as the entity itself. Carefully consider any matters that whitethorn negatively reflect on focal points integrity, ability and attitude. Such inquiries whitethorn be directed to the prospective clients bankers, legal counsel, underwriters, and others in the personal credit line community. Background checks obtained by investigative l ibertines may also be useful.3. Consider precautions response to observations about or suggestions for improvements in internal controls made by the predecessor analyzeor and/or the internal canvassor.4. Consider the composition and autonomy of the Board of Directors and the Audit Committee, including the function 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 following situations should be carefully considered in assessing whether to accept a client o There has been a disagreement with the preliminary auditor over business relationship principles or practices financial statement disclosures auditing scope or the Form 8-K dis boneys a reportable event as de very welld in Securities and Exchange Commission Regulation S-K. o The antecedent 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 CPA wholes have declined to serve the prospective client. There appears to be evidence of opinion shopping. 2. Return on rectitude (ROE=Net profit later impose /Total Shareholders Equity * 100) 2521/35469 x100 = 7. 11% Return on Assets (ROA=Net profit after tax / Total Assets * 100)2521/66820 x 100 = 3. 77Unfavorable Assets to Equity (Total Assets / Total Shareholders Equity) 66821/35469 = 1. 88 favorable Accounts receivable Turnover (Sales / Account receivable) 104026/7936 = 13. 10 favorable Average Collection Period (Account receivable / Sales * 365) 7936104026 x 365 = 27. 4 favorable strain Turnover (Cost of sales / Inventory) 69177/10487 = 6. 6Unfavorable Days in Inventory (Inventory / Cost of sales * 365) 10487/69177 x365= 44. 3Favorable Debt Ratio (Total Liabilities / Total Assets)31352/6 6821 = 0. 47Not available ( exertion figures) Debt to Equity (Total Liabilities / Total Shareholders Equity) 31353/35469 = 0. 88 Favorable Times evoke Earned ( gather before interest and tax / Interest expense) 6242/1474 = 4. 23Favorable Current Ratio (Current assets / Current liabilities)27064/14118 =1. 2favorable Profit Margin (Net Profit before interest and tax / Sales * 100) 6242/104026 x100 = 6. 00Unfavorable The comparison 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 have to select the division 2001 for comparison. The accounts show that the lodge is healthy and the ratios are principal(prenominal)ly favorable except that the follow is not properly leveraged and this is leading to a loss of opportunities and a lower profit margin and lower return on equity. There are no grounds of objection emanating from the ratios and the company can be authorita tive for auditing.3. What non-financial matters should be considered before pass judgment maritime as a client? How important are these issues to the client acceptance decision? wherefore? In order to minimize the likelihood of association with a client whose management lacks integrity, Statement on Quality Control Standards No. 2, System of Quality Control for a CPA Firms Accounting and Auditing Practice, (QC component part 20. 4) (applicable to auditing and accounting and review processs) provides that policies and procedures should be established for deciding whether to accept or continue a client relationship and to perform a unique(predicate) immersement for that client (QC surgical incision 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 probatively from fuddled to firm. Throughout the process, from initial consideration about accepting or continuing a client to military issue of an audit report, auditors are faced with riskiness.This risk can be thought of as having three components ? The entitys business risk The risk that the entity will not 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 costs and the cogitate rig on the auditors reputation and the risk of other costs (not link to litigation) such as the effects on fee realization. ? The auditors audit risk The risk that the auditor may unknowingly fail to appropriately transmute his or her opinion on financial statements that are materially misstated.The following discussion highlights matters that a firm may wish to consider in connection with establishing policies and procedures for client acceptance and continuance. The extent to which a firm may call for to employ any of the following is, with the exception of certain procedures required by broadly acc epted auditing standards, largely a matter of professional judgment. The discussion of specific policies and procedures is intended to be intriguing 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) maritime wants Barnes and Fischer to aid in developing and improving their IT system. What are the advantages and disadvantages of having the same audit firm provide both auditing and consulting services? Given current rules on professional emancipation in the Joint Code of paid Conduct, will Barnes and Fischer be able to jock Ocean with their IT system and quiesce 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 statement audit. This appointment as an IT system consultant violates this rule Consider whether any financial interests or relationships exist that would impair the port of the firms independence from the client and preclude its expression of an opinion on the entitys financial statements. The firm should consider regulation 101 of the AICPA Code of Professional Ethics. For clients that are public companies, the firm should also consider the requirements of the SEC . and also, Consider any potential conflicts of interest that could result from the acceptance of a client4 b. As requestd in the case, one of the fellows in another transferice has invested in a venture capital fund that owns shares of Ocean common stock. Would this situation constitute a violation of independence according to the Joint Code of Professional Conduct? Why or why not? The venture capital fund holds 50,000 shares of Ocean stock, shortly valued at approximately $18 a share. This investment represents just over a one-half of one percentage of the value of the funds total holdings.The partne rs total investment in the mutual fund is shortly 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 take away office so the company may go ahead with acceptance.5a)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 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 old age ago Oceans vice president of pay was charged with a misdemeanor involving prohibited gambling on local college footbal l 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 order in the company.The various checks carried out in Ocean include1. Entitys Business Risk o Management Engages in activities indicative of a lack of integrity. Is prone to engage in speculative ventures or accept unco high 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 scurrilous 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 naked 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 questionable. Has an inadequate capital base or is highly leveraged. Is experiencing worry in meeting restrictive debt covenants. Generates negative cash flows from operations but reports operating profits. Has publicly traded debt smashing that is below investment grade. Is a low tier 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 fastly changing technology. Is investing cash from short-term borrowings in semipermanent 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 saturatio n, product obsolescence, or declining demand. Has high operating 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 throughout the industry.EXAMINATION OF INDUSTRY 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 frequent 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 CLIENT NONE OF THE ABOVE MENTIONED RISKS ARE THERE FOR Barnes and Fischer .5. b. Prepare a withdraw memo to the partner briefly listing an d discussing the five or six most important factors or risk areas that will likely affect how the audit is conducted if the Ocean plight is accepted. Be sure to indicate specific ways 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 getting 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 watch on the profit margin of the company and in case of anomalistic behavior should call it in the auditors report Barnes and Fischer should follow SAS No. 47, as amended, Audit Risk and sensibleity in Conducting an Audit (AU Sectio n 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 Operations that are dominated by a single individual.o Undue emphasis 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 questionable estimates by executives.o Unrealistic figure 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 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 Substantial litigation involving the entitys business practices.o Material weaknesses or other reportable conditions in t he internal control structure.o Significant and unusually complex related party transactions. o Affiliates that are unaudited or audited by others.o Management espouses aggressive accounting principles.o Understaffed accounting department or inexperienced personnel.Financial reports not prepared on a timely basis. Please name 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. Remember, the Enron playFourth, the question is not clear if Barnes and Fischer have experience of auditing accounts of firms making small home appliances. Fifth, t he question mention in one place that Ocean wants to make a public issue, on the other distribute the company accounts are showing that the company is under leveraged, these 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 clear question in auditing. Please use the above guidelines and write an excellent 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. vindicationThere were several issues we considered when making our recommendation0Independence Violation0No experience in the industry0Cant do consulting because SOX violation0Red flag with regard to contact to previous auditor0Significant Mgt.Turnover0Uneth ical behavior (illegal gambling)03 years ago received qualified opinion0Aggressively accounting to meet creditors requirements0New accounting system0Audit trails not kept in tactFirst, we considered possible GAAS and GAAP 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 stand by 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 first general standard of GAAS. There is also 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 urinate 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 disgorge 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 unethical 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 inventory tracking and cost accumulation, receivable billing and aging, payroll tax deductions, payables, and balance sheet account classifications.This could also explain some of the aspects of the financial statements that appeared to be off compared 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 a ggressive 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.