Question 5 (a)
It has come to the attention of the audit firm that there are several issues surrounding the business operations of Ocean Manufacturing Inc that could deter the acceptance of the company as a client. This memo will clearly outline the reasons as to why the decision of not accepting the company as a client of the audit firm would be a viable choice. The factors identified are principal in any decision making process as they would save the reputation and time of the audit firm. Solutions to the problems observed in the company will be outlined so as to try uplifting the company.
The audit firm rejects Ocean Manufacturing Inc as a client since the auditor turnover rate of the company has been high over the past years hence making an auditing engagement with the company to be risky. The management has also been moving away from its core purpose for establishing the business. For example, the company’s vice president has had a charge relating to gambling; this will scare away investors as they would think their investment will be used for gambling. Over the past 12 years, there have been terminations of 3 auditors. This is a high auditors’ turnover. It has also been discovered that a qualified opinion was given relating to the company three years ago, and this is most likely to reoccur if the audit firm accepts the company as a client. The audit trails for the company are not present as they disappeared due to system failures and the use of untrained personnel to handle audit work. The preceding auditor stated that the management has a tendency of reflecting year-end accruals and revenue aggressively in order to meet the creditor’s requirements. This leads our firm to question the company’s ability to pay creditors when their obligation falls due.
As much as the company has all the negative issues mentioned above, there are solutions that can be suggested in order to ensure that an incoming auditor doesn’t have a problem when dealing with the company. The complexities and difficulties that arise with the new integrated IT system should be managed by the management rather than by the untrained personnel since the management is highly qualified. The company should also ensure that the incoming auditors are able to correct the weaknesses present in the operation of Ocean Manufacturing Inc. Inflation of the financial statement should stop since this would end up attracting litigation by shareholders once they float their shares to the public. It is the right of the company’s shareholders to know and have the true and fair view of all the company’s transactions. The company’s management should also ensure that it discloses all adjustments made during a reporting year.
In summary, the audit firm will not handle the financials of Oceans Manufacturing due to the internal issues relating to its management and auditors turnover; indicating we can also be terminated from our duties if we fail to reflect an impressive financial performance of the company through its financial statements. This shows that the financial reports do not reflect a true and fair view hence the value indicated of $3.4 million may be an overstated figure. The company’s, vice president being a person charged with illegal gambling; would reduce the interest that investors have of investing in the company when its shares are floated as an IPO since they would not trust such a person to manage the company. Lastly, the fact that audit trails were not kept intact makes the auditor’s work of tracing transactions to their source documents harder or unachievable. This creates room for illegal adjustment of values.
Oceans Manufacturing Inc will have to push its listing to another month after they have engaged another auditor. Another option could be to engage Barnes and Fischer to audit the financial statements on the condition that the date of listing is pushed to a later month to streamline the financial statements and internal controls of the company.
Question 5 (b)
It has come to our attention that Oceans Manufacturing Inc is faced by various challenging issues that pose as risks that would affect the auditing process if the audit firm were to accept the engagement. This memo will outline six issues that have been recognized to be key risks that would create challenges in the auditing processes that are expected to be conducted by the audit firm. These may attract a qualified opinion if they are not addressed before the listing of the company.
The new IT system could pose several challenges when working with it, and hence system failures may be inherent. The fact that the IT system is handled by untrained personnel whereas the management has the potential to run it smoothly creates a risk toward the collapse of the company’s IT department. This, as observed, has affected the audit trails which are a core element in auditing. Another risk is the high auditor’s turnover observed over the 12 year period. This could be used by the management to scare the incoming auditors especially if they detect discrepancies in the financial statements. The riskiness involved in auditing Oceans Manufacturing Inc is high after it received a qualified report in the recent past. This might portray a bad image of the firm even before it engages in the company’s audit.
Another risk is the fact that the vice president was once charged with illegal gambling. This would induce trust issues especially to the shareholders once the company lists in the stock exchange. The aggressive reflection on the financial statements of the company by the management is another problem that will be faced by the audit firm since they have to correct all the financial statements for the last 5 years. This will be important because potential investors will use them to base their decision on whether to invest in the company by looking at the company’s financial trend. Audit trails have been lost indicating it would be tough to trace transactions to their source documents.
The challenges outlined above will, therefore, require that the approach basis of the audit firm to be adjusted. Transaction figures will be evaluated on matters of judgment and comparison to market prices. To avoid overstatements, the auditors will have to review Oceans Manufacturing Inc’s financial reports for the 5 years preceding their engagement to create a true and fair view of the company and the company would have to outline the fact that the vice president was charged with illegal gambling but was not convicted. Auditors will also have to take control of the internal controls of the company, and the IT system with the help of management to correct the problems identified.
In summary, despite the challenges posed by the business operations of the company, there are solutions that can be underlined to assist the audit process of Oceans Manufacturing Inc.
Participation is highly recommended between the whole management and the auditors.
These issues are expected to be immediately addressed immediately the engagement between the two parties commences so as to ensure that the date of listing is not postponed to a far date and that all financial statements and disclosures portray a true and fair view of Oceans Manufacturing Inc.
