Ocean Manufacturing Inc.

Ocean Manufacturing, Inc.[1]

The New-Client Acceptance Decision

Learning Objectives

* Understand 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 in the decision to accept or reject a prospective client

* Understand the process of making and justifying a recommendation regarding client acceptance

The accounting firm of Barnes and Fischer, LLP, is a medium-sized, national US-based CPA firm. The partnership, formed in 1954, now has more than 6,000 professionals on the payroll. The firm mainly provides auditing and tax services, but it has recently had success in building the information-systems-consulting side of the business.

It is mid-January 2005, and you are a newly promoted audit manager in an office of Barnes and Fischer, located in the Pacific Northwest. You have been a senior auditor for the past three years of your five years with Barnes and Fischer. Your first assignment as audit manager is to assist an audit partner on a client acceptance decision. The partner explains to you that the prospective client, Ocean Manufacturing, Inc. is a medium-sized manufacturer of small home appliances. The partner recently met the company's president at a local chamber of commerce meeting. He indicated that, after some difficult negotiations, the company has decided to terminate its relationship with its current auditor. The president explained that the main reason for the switch is to establish a relationship with a more nationally known CPA firm because the company plans to make an initial public offering (IPO) of its common stock within the next few years. 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....