4551PracticeQuestionsS2011

4551PracticeQuestionsS2011 - 4551 Questions from Past...

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4551 Questions from Past Midterms Question 1 (15 marks – 36 minutes) You are an audit manager with the audit firm Barnes and Fisher LLP. You have been assigned to assist an audit partner on a client acceptance decision. The prospective client, Ocean Manufacturing Inc. (OMI), is a medium-sized manufacturer of small home appliances. The partner considers this a great opportunity for Barnes and Fisher since it represents a new client industry. Most of Barnes and Fisher’s clients are in the healthcare services industry. After some difficult negotiations, OMI has decided to terminate its relationship with its current auditor. The president explained that the main reason for the switch is to build a relationship with a larger CA firm that is better equipped to handle the company plans to make an initial public offering (IPO) in the next year. Over the past three years, OMI has grown significantly. Earnings have increased substantially each year for the past three years and OMI’s products are growing in popularity. Ocean’s annual financial statements have been audited for the last 12 years in order to comply with debt covenants. In 2007, the company experienced significant management turnover when both the vice- president of operations and the controller resigned to take other jobs. The new VP operations has an MBA and 12 years industry experience. The new controller has little relevant industry experience and minimal experience as a controller. Other members of the management team have been with OMI for quite some time and are very knowledgeable. The company switched to a new integrated central accounting system in early 2007. The former controller handled the transition to the new system. Unfortunately, the transition was not well managed and the company is still working to modify the system. During several brief periods throughout 2007, audit trails were not kept intact due to system failures and untrained staff made many errors. The accounting staff tell you that since the new accounting system has been introduced, internal budget reports, inventory status reports, and receivables billings are often late and inaccurate, and several important shipping deadlines have been missed. When visiting the manufacturing plant, you note that finished goods inventories are organized and well protected, but in-process inventories are somewhat less organized. In addition, the company uses a complicated hybrid form of process costing that only the former controller understood well. Initially, OMI’s Chief Financial Officer did not want you to speak to the previous auditor. However, once you explained it was a required procedure, he relented. During your visit 1
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with the previous auditor, he told you that the termination of the relationship between his firm and OMI was a mutual agreement. He indicated his firm had problems with OMI primarily related to: (1) the complexities of the new accounting system and (2) management’s tendency to aggressively reflect year-end accruals. Three years ago, the
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4551PracticeQuestionsS2011 - 4551 Questions from Past...

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