382Acc Auditing And Internal Control Assessment Answer

Ocean’s management reluctantly gives Barnes and Fischer permission to contact the predecessor auditor. The engagement partner at the predecessor firm indicates he had problems dealing with Ocean’s new IT system and management’s tendency to become aggressive with financial reporting issues (year-end accruals and revenue recognition) to meet creditor requirements for relatively favorable interest rates. He also indicates there had been some disagreement over theproposed audit fee.

Two independence issues are raised for research or discussion. These involve consulting servicesand an immaterial indirect financial interest by a partner in another office.Ocean has recently implemented a new IT system, and the transition has not gone smoothly. As a result, some audit trails have not been successfully maintained.

Risk of material misstatement is high in :

1) inventory tracking and cost accumulation,

2) receivables billing and aging,

3) payroll deductions,

4) payable balances, and

5) balance sheet account classifications.

There has been significant management turnover in the past year. A client background check reveals that the V.P. of finance was charged with illegal gambling five years ago, raising a management integrity issue.

Required:

1. The client acceptance process can be quite complex. Identify five procedures an auditor should perform in determining whether to accept a client. Which of these five are required by auditing standards.

2. What nonfinancial matters should be considered before accepting Ocean as a client? How important are these issues to the client acceptance decision? Why?

3. Using Ocean’s financial information, calculate relevant preliminary analytical procedures to obtain a better understanding of the prospective client and to determine how Ocean is doing financially. Compare Ocean’s ratios to the industry ratios provided. Identify any major differences and briefly list any concerns that arise from this analysis.

4. Ocean wants Barnes and Fischer to aid in developing and improving its IT system. What are the advantages and disadvantages of having the same CPA firm provide both auditing and consulting services? Given current auditor independence rules, will Barnes and Fischer be able to help Ocean with its IT system and still provide a financial statement audit?

As indicated in the case, one of the partners in another office 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 Code of Professional Conduct? Why or why not?