Otter Creek Mills, Inc.
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.
2008 2007
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= 1.97 66,821/35,469= 1.88
Acct. Receive turnover= sales/A.R.= 145,313/11,907= 11.69 104,026/7,936= 13.11
Debt to Equity= liab./Equity= 37,557/38,835= 0.97 31,352/35,469= 0.88
Current ratio=c assets/c.liab.= 32,488/17,557= 1.85 27,064/14,118= 1.92
Times interest earned= o.Income/int exp= 7,993/1,700= 4.70 6,242/1473= 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
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.
2008 2007
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= 1.97 66,821/35,469= 1.88
Acct. Receive turnover= sales/A.R.= 145,313/11,907= 11.69 104,026/7,936= 13.11
Debt to Equity= liab./Equity= 37,557/38,835= 0.97 31,352/35,469= 0.88
Current ratio=c assets/c.liab.= 32,488/17,557= 1.85 27,064/14,118= 1.92
Times interest earned= o.Income/int exp= 7,993/1,700= 4.70 6,242/1473= 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