There are many procedures that auditors must perform before accepting a client. The first procedure is to evaluate the management of Ocean Manufacturing. The reason auditors must do this is that management without integrity will make it more difficult for auditors to do their jobs and increase audit risk. Auditors will not be able to perform sufficient work to compensate for increased audit risk when client management lacks integrity. Since no major issues have been discovered aside from the VP's past gambling habits, it can be assumed that management has sufficient integrity. The second procedure involves speaking with the previous auditor by asking the client's permission to discuss confidential information with them. When speaking with previous auditors, current auditors will need to talk about the integrity of the client, the issues they faced with the client, and why their relationship with the client ended. It was discovered that one of the main reasons why the relationship between the previous auditor and Ocean broke down was the complexity and problems with the new IT system. Since the current auditors have a confident IT team, this is a reason to accept the client. Another reason their relationship dissolved was because Ocean wanted to aggressively adjust year-end deals, which could be an argument against accepting them, as it could mean it's difficult to work with the customer. The third procedure consists of assessing the independence of the auditors vis-à-vis the Océan holding company. Given that the only independence issue discovered is that of a partner indirectly holding $2,800 and even though he has no control over Ocean's activities, it is reasonable to assume that there is no no independence problem. Another step to follow is to understand the client's business and the industry in which they operate. This can be done by on-site visiting its offices and facilities, reviewing industry publications and factors that impact the industry and sector. the client's business. The final procedure necessary to accept a client is to determine whether the auditors have or can acquire the technical skills and industry knowledge necessary to perform the audit according to standards. These five procedures are all required by auditing standards. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get an original essay There are many non-financial issues to consider before accepting Ocean as a client. The first focuses on recent staff turnover. If staff turnover is due to conflicts within the firm, it could mean other problems at the client's firm that could increase audit risk. Additionally, due to the recent change in management, the new controller may not know enough about the company, its operations, and may not have enough experience to contribute to the audit, which could mean that the The audit would take more time. Another important point to consider is the auditor turnover rate. When a client changes many auditors in a short period of time, this is a strong red flag that they are not accepting the client. Barnes and Fischer, LLP, needs to find out why auditor turnover is high. The third point to look at is the new computer system. The computer system posesmany problems, such as not getting the information they need from the system and even if there are adequate controls on the new system. If controls are lacking in the IT system, the number of substantive tests required will increase. The fourth problem is the fact that Ocean is considering an IPO. If the IPO goes ahead, Ocean will be a valued customer, but as there will be more users of the financial statements, legal risk could be increased. The reason for the increased legal risk is that now that there are more users of the financial statements, if a user loses money with Ocean, they could blame the auditors. The fifth question is the relationship with the previous listeners. Since Ocean was reluctant to hold a meeting for new and previous listeners, this could raise concerns if Ocean tried to hide something. Since the relationship with the old auditor and Ocean had many difficulties, the new auditors will have to take this into account. Additionally, there have been issues regarding audit fees with the latest auditors, which means that Barnes and Fischer, LLP, should be careful about this. There are, however, positive non-financial aspects, such as the fact that with Ocean as a client, Barnes and Fischer, LLP could expand into another sector. As mentioned earlier, if Ocean goes public, it could become a larger company and thus become an even more valued and attractive customer. There are also financial issues to consider when deciding whether to take on a new client. Refer to the appendix for more details. The reason financial questions are important is because they help to better understand the potential client and auditors can better understand where the client stands in relation to the rest of the industry. The first financial problem discovered is that the ROE is much lower than the industry. This could suggest that management may want to aggressively adjust year-end trading to better match the industry and please its shareholders. Another problem is that accounts receivable are much higher than those in the industry. This could potentially mean they are overstating their accounts receivable. Another major financial concern is the fact that inventory has increased significantly over the past three years. This means the auditor will need to determine whether this is due to better inventory systems or whether there are misstatements in the financial statements. The last major financial concern is that the profit margin is very low compared to the industry. This could also suggest that Ocean may want to aggressively adjust year-end trading to improve its profit margin. Since one of the partners has indirectly invested in Ocean, materiality needs to be considered. If the investment was direct the problem is not acceptable, but as the investment is indirect the relative importance needs to be considered. In the case, it is stated that the partner's stake in the venture fund is $56,000 and the venture fund holds 0.5% of Ocean in its fund. This means he indirectly owns $2,800, which is not significant. Therefore, the problem is acceptable. Keep in mind: this is just a sample. Get a personalized document from our expert writers now. Get a Custom Essay The first important factor and risk area that will affect how the audit is performed if Ocean is accepted as a client is the fact that many audit trails.