Ocean Manufacturing Case
1) Obtain and review financial information about the prospective client: annual reports, interim statements, registrations statements, Form 10-k’s, and reports to regulatory agencies.
2) Detailed criminal background checks of senior managers.
3) Evaluate the public accounting firm’s independence with regard to prospective clients.
4) Inquire of the prospective clients’ bankers, legal counsel, underwriters, analysts, or other persons who do business with the entity for information about the entity and its management.
5) Consider the need for individuals possessing special skills or knowledge to complete the audit (e.g., IT auditor, valuations specialist, industry specialist)
2. Overall, after calculating a few of Ocean ...view middle of the document...
3. There are a few non-financial items the company should consider.
a) The VP of finance was charged with a misdemeanor related to illegal gambling. Raises questions about the tone at the top and the integrity of management.
b) The company is struggling with the implementation of a new IT system that may require the team to spend more time testing data or even obtaining data
c) The company has changed auditors three times in the last 12 years. Couple that with the fact that the VP of Finance was hesitant to grant permission to speak to the previous auditor, it should raise some flags.
d) The new controller has little experience raising questions about the competency of management.
e) After speaking with the previous auditor we learned that “management has tendency’s to aggressively reflect year-end accruals in order to meet creditor requirements” could suggest that there is more risk of fraud
a. Some of the advantages of having Barnes and Fisher, LLP, aid in developing and improving the IT system would be that the auditors are familiar with the industry and the company specifically which could enhance the functionality of the system. Disadvantages would be that the firm would be in a way auditing its own work, which could lead to biased or independence issues.
Because Ocean Manufacturing is currently a non-issuer, the firm is allowed to provide services on its IT system. Under SOX, firms are prohibited from providing services with regard to “design or implementation of financial information systems” However, Barnes and Fischer “are not required to follow SOX guidelines for their non-SEC clients.”
b. Because the partner is not a covered member (from a different branch) and the amount is rather immaterial, this would not constitute a violation of independence.