Jan 12_Client Acceptance and Risk Assessment

Auditing Cases: An Interactive Learning Approach (4th Edition)

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Case 1.1 Ocean Manufacturing, Inc. Examine the following: I. Standing in the business community II. Financial stability III. Relations with its previous CPA firm IV. . V. . For prospective clients that have previously been audited by another CPA firm, the new auditor is required by SAS 84 (AU 315) to communicate with the predecessor auditor. o Predecessor auditor is required to respond to the request for info. o Confidentiality requirement in the Code of Professional Conduct requires that the predecessor auditor obtain permission from the client before the communication can be made o Unusual circumstances (ie legal problems, disputes) can limit the information provided (most severe case is simply stating that “no information we be provided”). Gather information from local attorneys, other CPAs, banks, and other businesses Hire a professional investigator to obtain information about the reputation and background of the key members of management Short-Term Debt-Paying Ability = + Cash ratio cash marketable securitiescurrent liabilities = + + Quick Ratio Cash marketable securities net account receivablecurrent liabilites = Current ratio current assetscurrent liabilities Liquidity Activity Ratios = Accounts receivable turnover net salesaverage gross receivables Days to collect receivables = 365 daysaccounts receivable turnover = Inventory turnover cost of goods soldaverage inventory = Days to sell inventory 365 daysinventory turnover Ability to meet long-term obligations
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Jan 12_Client Acceptance and Risk Assessment - Case 1.1...

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