memo 5a
TRANSCRIPT
5A.
MEMORANDA
Barnes and Fischer should not accept Ocean Manufacturing, Inc., because the
risks associated with this client outweigh the benefits of accepting the engagement. We
feel as though, after a conducting a thorough investigation on Ocean, accepting the
client would elevate our engagement risk—which could ultimately harm our firm.
The risks associated with this client include:
Ocean Manufacturing has had problems with their auditors. Over the past 12 years
Ocean Manufacturing switched auditors three times and had problems agreeing on
auditing fees. The previous auditor had two major problems with Ocean: Ocean’s
complex IT system and managements’ tendency to aggressively reflect year-end
accruals and revenue in order to meet creditor requirements. In addition, there have
been many problems with tracking and recording transactions that occur within the
entity. All of these are risk factors can lead to known or likely material misstatements
being present within the company’s financials, and ultimately they the potential to cause
engagement complications. Judging from the past, if we ask Ocean to change or alter
any aspects regarding their business, it is likely they will drop our firm’s services and
search for another auditor.
There have also been problems related to Ocean’s management: The previous
Controller, who poorly managed the company’s IT system, resigned from the company;
the present Controller lacks the experience the company needs; and the Vice-President
of the company was charged with a misdemeanor and was involved with illegal activity.
Not to mention, Ocean’s President was hesitant in letting our firm communicate with the
predecessor auditor. All of these factors act as red flags when determining whether or
not we would like to take on this company as a client.
Also, conducting analytical procedures shed light on Ocean’s financial position
compared to other companies within the industry. There are too many substantial
differences between the Ocean’s financial position and the industry’s position. This may
shed light on Ocean’s going concern within the future.
Because our lack of experience in the small home appliance industry, we believe
conducting an audit for Ocean will be more costly to our firm. Not only are the risks
costly, but also the time and money involved in taking on this client are much too costly.
Benefits need to outweigh the costs in order to accept this engagement.
After all the disadvantages listed, there are still some positive aspects about
accepting this company as a client. Although we firmly believe Barnes Fischer should
not take on Ocean as an audit client, we possibly believe we could take them on as an
IT systems client. We will continue to build a relationship with this company by
accepting them as an IT client. Our firm believes we have the resources to help
resurrect the company’s IT system—we will be able to help track its weaknesses,
modify the system, and provide training and instruction to company employees. Overall,
this will help the company’s accounting system to become fully functional—eliminating
the problems that occurred previously.