Reem Mohammad

Ocean Manufacturing Case

1. Procedures an auditor should take before accepting a new client are:

Investigating the company to determine its acceptability as well as
understand the clients background, which is required under auditing standards,
Auditing standards require that the CPA firm communicate with the
predecessor auditor of the company.
Assess the audit risk of the client.
Inquire with Third Parties (Creditors) about the clients integrity.
Require that the auditor is independent under auditing standards.
Make sure the firm has the capabilities to do the audit as required
by the auditing standards.
2. Ocean Manufacturing Ratios

Ratio
ROE
ROA
Assets to Equity
Current Ratio
Profit Margin

2010
7.11%
3.77%
1.88
1.92
7.23%

2011
8.94%
4.45%
1.97
1.85
7.02%

Ocean manufacturing does not compare that well with the rest of
its competitors in the home appliance industry. Its return on equity for example, is
8.94% in 2011, so out of all the money the shareholders invested it only
generated a 9% profit. Their competitors however are generating 26.22% return
on what their shareholders invested. However, Ocean Manufacturings current
ratio in 2011, 1.85, is higher than the industry average of 1.44, which means it
can pay its short term liabilities with its current assets.
3. Barnes and Fisher should consider Ocean Manufacturings (OM) reason for
wanting to switch auditors.There seems to be a conflict in how OMs management
reflects year-ends accruals to meet creditors expectations. Also, OMs new IT system
does not accurately record the financial transactions of the company.OMs management
turnover makes it risky to adopt as a new client. Another factor to consider is B&Fs lack
of experience in the home appliance industry. It might not have the knowledge and
experience to properly conduct an audit of OM.
4.
One advantage of B&H offering consulting and audit services is
that it is cost effective for OM to have the same firm offer its services than to look
for a new firm to perform non-audit services. The other is that B&H will gain an
audit and IT client and a chance to break into a new industry. The disadvantages
are that it can lead to biased audits because B&H will be auditing its own work, a
risk of independence if OM goes public.

i.
Because OM is not a public company yet B&H will
be allowed to offer consulting services such as helping OM with its IT
system as long as the CPA firm does not perform management functions
or make management decisions. However because, OM is planning on
becoming a public company and under the SEC B&H will not be allowed
to offer any non-audit services once OM becomes public.
ii.
According to the AICPA, the B&H Salt Lake City
office partner violates the financial interest standards if he has an indirect
interest in OM and if that indirect interest is material to the auditor. The
partner is invested in a venture capital fund that owns some stock of OM.
The Partners investment in OM is one half of a percent so if that amount
is material then it violates the financial interest standards.
5.

a.)
B and F
Audit and Consulting
09/16/2016
To: The Partner
Subject: Accept Ocean Manufacturing as an audit client

It is not recommended to accept Ocean Manufacturing as an audit client. Ocean

Manufacturing has many risks an audit client. Financially it is not doing well as others in the
industry. It also has problems with its IT system which make its risk of material misstatement
higher because, its system cannot accurately record the financial transactions of the business.
The IT system could easily be handled by our team but there are still other risks associated with
Ocean Manufacturing. There is also the issue of independence if B and H takes Ocean
Manufacturing as a client and it goes public than B and H cannot design an IT system for it.
Ocean Manufacturings management turnover is also worrisome because, the new controller is
not adept to its IT system. While it would be good for B and H to enter into a new industry such
as home appliances Ocean Manufacturing is not a good way to break into it. B and H also has
no experience in this industry or helping a company transform from private to public. It would be
best to not take on Ocean Manufacturing as a client and offer our consulting services instead.

Thank you,
Auditor

b.)
B and F
Audit and Consulting
09/16/2016

To: The Partner

Subject: Ocean Manufacturing
If we do accept Ocean Manufacturing as a client we will be taking a lot of risks.
One risk is that we, B and H, have no prior experience in auditing any client in the home
appliance industry. Another is the clients financial performance; it is not out performing or
performing as well as those in its industry. The recent management turnover also raises some
concerns because, of the controllers lack of experience and the previous VPs misdemeanor.
The accounting staffs inexperience with their IT system causes a risk because they are not
inputting financial information correctly into the system. Lastly, designing an IT system for a
company that is willing to go public is a risk because, under the independence rules a CPA firm
cannot perform nonattest services to audit clients.
Thank you,
Auditor