Otter Creek Mills, Inc.

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Case # 1
OTTER CREEK MILLS, INC.

1- The client acceptance process can be quite complex. Identify procedures required by auditing standards that should be performed in determining whether to accept a client? Identify other procedures not required that you may also perform. Some procedures that an Auditor firm should follow before accepting an engagement are: a. The auditor firm should follow the procedures established in the quality control procedures. b. Look if firm is independent respect to that client.

c. Have a good understanding of the client and its industry, if not, be sure to acquire it. d. Be sure the integrity of the prospective client.
e. After permission from the prospective client communicate with the predecessor auditor. Also,
a. Review client’s financial information.
b. Inquire of third parties like banks, attorneys etc. about the prospective client. c. Evaluate business risks and opportunities bring by the new client.

2- Using Otter’s financial information, calculate relevant preliminary analytical procedures to obtain a better understanding of the prospective client and to determine how Otter is doing financially. Compare Otter’s ratios to the industry ratios provided. Identify any major differences.

20082007
Return on Assets = Net Income/Assets= 3,472/76,392= 4.54%2,521/66,821= 3.77% Return on Equity = Net Income/Equity= 3,472/38,835= 8.94%2,521/35,469= 7.11% Assets to Equity= Assets/Equity=76,392/38,835= 1.9766,821/35,469= 1.88 Acct. Receive turnover= sales/A.R.=145,313/11,907= 11.69104,026/7,936= 13.11 Debt to Equity= liab./Equity=37,557/38,835= 0.9731,352/35,469= 0.88 Current ratio=c assets/c.liab.=32,488/17,557= 1.8527,064/14,118= 1.92 Times interest earned= o.Income/int exp=7,993/1,700= 4.706,242/1473= 4.24 Some ratios are improving like Return on assets (ROA) and Return on Equity (ROE), but others are getting worst like the account receivables turnover. And comparing it with the industry we find that Otter has a lower Return on assets (ROA) and Return on Equity (ROE) relative the industry and the account receivables turnover is high relative to the industry.

3- What nonfinancial matters should be considered before accepting Otter as a client? How important are these issues to the client acceptance decision? Why? Nonfinancial matters to consider:
a. A complicated information technology system that represent problems to the auditors. b. Too recent management turnover could make the audit work slower and more difficult. c. The client hesitation to allow the new auditor talk with the predecessor. d. Otter’s vice-president of finance gambling sitiation.

e. The negative relationship with the previous auditor.
f. The aggressiveness of the management to manipulate the financial statements. g. High auditor turnover rate.

4- (a) Otter wants Barnes and Fischer to aid in developing and improving its IT system. What are the advantages and disadvantages of having the same CPA firm provide both auditing and consulting services? Given current auditor independence rules, will Barnes and Fischer be able to help Otter with its IT system and still provide a financial statement audit? Support your conclusion with appropriate citations to authoritative standards. A great deal of efficiency could be gained by the same firm providing both kinds of services because the firm can leverage the auditor’s understanding of the client and its information system. For public companies the auditor is not permitted to provide certain types of consulting services. Financial information systems design and implementation is not an approved consulting service under Sarbanes Oxley Act of 2002. So until Otter executes its planned initial public offering, Otter is a privately-held company and is thus subject to AICPA independence requirements. The AICPA Code of Professional Conduct indicates that systems implementation is an acceptable nonattest service to provide to audit...
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