Ocean Manufacturing, Inc.
The new client acceptance decision
l ea r ning o bj e C t ive s
After completing and discussing this case you should be able to
c as e
Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt
the types of information relevant to evaluating a prospective audit client  List some of the steps an auditor should take in deciding whether to accept a prospective client
Identify and evaluate factors important to the client acceptance decision  Understand the process of making and justifying a recommendation regarding client acceptance
The accounting firm of Barnes and Fischer, LLP, is a ...view middle of the document...
Ocean’s annual financial statements have been audited each of the past 12 years in order to comply with debt covenants and to receive favorable interest rates on the company’s existing line of credit. Because the company’s December 31 fiscal year-end has already passed, time is of the essence for the company to contract with a new auditor to get the audit under way. The partner, Jane Hunter, is intrigued with the idea of having a client in the home appliance industry, especially one with the favorable market position and growth potential of Ocean Manufacturing. Although there are several manufacturers of small home appliances in the area, your office has never had a client in the industry. Most of your office’s current audit clients are in the healthcare services industry. Thus, the partner feels the engagement presents an excellent opportunity for Barnes and Fischer to enter a new market. On the other hand, knowing the risks involved, the partner wants to make sure the client acceptance decision is carefully considered.
The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. Ocean Manufacturing is a fictitious company. All characters and names represented are fictitious; any similarity to existing companies or persons is purely coincidental.
Copyright © 2012 by Pearson Education, Inc., Upper Saddle River, NJ 07458
section 1: client acceptance
Ocean Manufacturing, Inc. manufactures small- to medium-sized home appliances. The company’s products include items like toasters, blenders, and trash compactors. Although Ocean’s common stock and other securities are not publicly traded, the company is planning an IPO in the next few years in hopes that it will be able to trade Ocean’s common stock on the NASDAQ. You have been assigned to gather information in order to make a recommendation on whether your firm should accept Ocean Manufacturing as a client. Ocean wants to hire your firm to issue an opinion on its December 31, 2011 financial statements and has expressed interest in obtaining help to get its recently installed information technology (IT) system in better shape. Ocean also wants your firm’s advice and guidance on getting everything in order for the upcoming IPO. During the initial meeting with Ocean’s management, the following information was obtained about the industry and the company.
The Home Appliances Industry
Over the past several years, the domestic home appliances industry has been growing at a steady pace. The industry consists of a wide variety of manufacturers (domestic and foreign) who sell to a large number of wholesale and retail outlets. Though responsive to technological improvements, product marketability is linked to growth in the housing market. Retail outlets are served by both wholesale and manufacturer...