Ocean Manufacturing, Inc.

Case 1.1 – Ocean Manufacturing, Inc.

[1] 1. Examine the prospective client’s standing in the business community

2. Examine the prospective client’s financial stability

3. Examine the prospective client’s relations with its previous CPA firm

4. Communicate with the predecessor auditor (required)

5. Gather information from local attorneys, other CPAs, banks and other businesses

[2]

Differences:

1. Ocean’s ROE is significantly lower than the industry’s

2. Ocean’s assets to equity ration is lower than the industry’s

3. Ocean’s accounts receivable turnover is higher than the industry’s

4. Ocean’s debt to equity is significantly lower than the industry’s

5. Ocean’s times interest earned is higher than the industry’s

6. Ocean’s profit margin is lower than the industry’s

[3] One non-financial matter that should be considered is if the client is a newely formed,

rapidly growing business. If a new business is rapidly growing, there is a greater

chance it may fail, leaving the CPA firm exposed to significant potential liability.

Another non-financial matter that should be considered is any legal matters the client

may have been previously involved in. If the business is a manufacturing company,

the firm may want to consider the rate of return on its products.

[4] [a] One advantages is that Barnes and Fischer would already have a feel for the

company. The company may not have to pay as much because they are using one

firm (who may cut them a deal) instead of using two different firms. One

disadvantage would be that Ocean would be given only one outside opinion,

whereas a second opinion may be good. Another disadvantage would be that there

are CPA firms that are licensed that may be a better fir for the IT job.

Because of the Sarbanes-Oxley Act of 2002, Barnes and Fischer is not...