Ocean Manufacutring Inc - the New-Client Acceptance Decision Solutuons

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 build¬ing 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 part¬ner 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 diffi¬cult 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 com¬pany'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 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 small home appliance manufacturers in the area, your office has never had a client in the industry. Most of Barnes and Fis¬cher'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, Jane Hunter, wants to make sure the client acceptance decision is carefully considered.

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Ocean Manufacturing, Inc. manufactures small- to medium-sized home appliances. Although Ocean's common stock is not publicly traded, the company is planning an IPO in the next few years in hopes that they will be able to trade the stock on the NASDAQ. You have been assigned to gather information in order to make a recommen¬dation on whether your firm should accept Ocean Manufacturing as a client.

Ocean wants to hire your firm to issue an opinion on their December 31, 2004, financial statements and has expressed interest in obtaining help in getting their recently installed information technology (IT) system in better shape. They also want 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, moderate 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, prod¬uct marketability is linked to growth in the housing market. Retail outlets are served by both wholesale and manufacturer representatives.

Ocean Manufacturing, Inc. Ocean's unaudited December 31, 2004, financial statements report total assets of $76 million, sales revenues of $145 million, and net profit of $3.4 million. In the past, the company has not attempted to expand aggressively or develop new product lines. Rather, it has concentrated on maintaining a steady growth rate by providing reliable products within a moderate to low price range. However, Ocean hopes to use the capital from the upcoming IPO to aggressively expand