Ocean Manufacturing, Inc.

The new applicant accepting decision Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt l ea r n ing o bje C t ive s After commutual and discussing this case you should be able to [1] Understand the types of admonition accordant to evaluating a -to-be assay client [2] Account some of the accomplish an accountant should booty in deciding whether to acquire a -to-be client Identify and appraise factors important to the client accepting decision [4] Acquire the action of accurate and justifying a advocacy apropos applicant acceptance [3] INTRODUCTION The accounting close of Barnes and Fischer, LLP, is a medium-sized, civic CPA firm. The partnership, formed in 1954, now has over 6,000 professionals on the payroll. The close mainly provides auditing and tax services, but it has afresh had success architecture the admonition systems consulting ancillary of the business for non-audit audience and for assay audience that are not about traded. It is mid-January 2012, and you are a anew answer assay ambassador in an appointment of Barnes and Fischer, amid in the Pacific Northwest. You acquire been a chief accountant for the accomplished three of your bristles years with Barnes and Fischer. Your aboriginal appointment as assay ambassador is to abetment an assay accomplice on a applicant accepting decision. The accomplice explains to you that the -to-be client, Ocean Manufacturing, is a medium-sized architect of baby home appliances. The accomplice afresh met the company’s admiral at a bounded alcove of business meeting. The admiral adumbrated that, afterwards some difficult negotiations, the aggregation has absitively to abolish its accord with its accustomed auditor. The admiral explained that the basic acumen for the about-face is to body a accord with a added nationally accustomed CPA close because the aggregation affairs to accomplish an antecedent accessible alms (IPO) of its accustomed banal aural the abutting few years. Ocean’s anniversary banking statements acquire been audited anniversary of the accomplished 12 years in adjustment to accede with debt covenants and to acquire favorable absorption ante on the company’s absolute band of credit. Because the company’s December 31 budgetary anniversary has already passed, time is of the aspect for the aggregation to arrangement with a new accountant to get the assay beneath way. The partner, Jane Hunter, is absorbed with the abstraction of accepting a applicant in the home apparatus industry, abnormally one with the favorable bazaar position and advance abeyant of Ocean Manufacturing. Although there are several manufacturers of baby home accessories in the area, your appointment has never had a applicant in the industry. Best of your office’s accustomed assay audience are in the healthcare casework industry. Thus, the accomplice feels the assurance presents an accomplished befalling for Barnes and Fischer to access a new market. On the alternative hand, alive the risks involved, the accomplice wants to accomplish abiding the applicant accepting accommodation is anxiously considered. The case was able by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a base for chic discussion. Ocean Accomplishment is a apocryphal company. All characters and names represented are fictitious; any affinity to absolute companies or bodies is absolutely coincidental. Copyright © 2012 by Pearson Education, Inc., Upper Saddle River, NJ 07458 3 section 1: applicant acceptance BACKGROUND Ocean Manufacturing, Inc. articles small- to medium-sized home appliances. The company’s articles accommodate items like toasters, blenders, and debris compactors. Although Ocean’s accustomed banal and alternative antithesis are not about traded, the aggregation is planning an IPO in the abutting few years in hopes that it will be able to barter Ocean’s accustomed banal on the NASDAQ. You acquire been assigned to accrue admonition in adjustment to accomplish a advocacy on whether your close should acquire Ocean Accomplishment as a client. Ocean wants to appoint your close to affair an assessment on its December 31, 2011 banking statements and has bidding absorption in accepting admonition to get its afresh installed admonition technology (IT) arrangement in bigger shape. Ocean additionally wants your firm’s admonition and advice on accepting aggregate in adjustment for the accessible IPO. During the antecedent affair with Ocean’s management, the afterward admonition was acquired about the industry and the company. The Home Accessories Industry Over the accomplished several years, the calm home accessories industry has been growing at a abiding pace. The industry consists of a advanced array of manufacturers (domestic and foreign) who advertise to a ample cardinal of broad and retail outlets. Though acknowledging to abstruse improvements, artefact marketability is affiliated to advance in the apartment market. Retail outlets are served by both broad and architect representatives. Ocean Manufacturing, Inc Ocean’s unaudited December 31, 2011 banking statements abode absolute assets of $76 million, sales revenues of $145 million, and net accession of $3.4 million. In the past, the aggregation has not attempted to aggrandize aggressively or advance new artefact lines. Rather, it has concentrated on advancement a abiding advance amount by accouterment reliable articles aural a abstinent to low price range. However, Ocean hopes to use the basic from the accessible IPO to aggressively aggrandize from a bounded to a civic market. Ocean primarily sells its articles in baby quantities to alone endemic apparatus stores. Over the aftermost few years the aggregation has amorphous to accession beyond quantities to three civic retail chains. Two of these beyond retailers started affairs Ocean’s articles about two years ago. In adjustment to handle the added sales, Ocean decidedly broadcast its accomplishment capacity. Though annoyed by contempo administration about-face and advancing difficulties with the company’s new accounting system, administration feels that Ocean is in a position to abound considerably. Administration addendum that antithesis acquire added essentially anniversary year over the accomplished three years and that Ocean’s articles acquire accustomed accretion accepting in the baby apparatus marketplace. Three years ago, the aggregation accustomed a able assay assessment apropos to revenues and receivables. Ocean has afflicted auditors three times over the accomplished 12 years. Management In October 2011, the aggregation accomplished cogent administration about-face back both the vicepresident of operations and the ambassador accommodated to booty jobs in alternative cities. The acumen for their abrogation was appear by administration as actuality accompanying to “personal issues.” A new vice-president, Jessica Wood, was assassin in November, and the new ambassador abutting aboriginal aftermost month. Jessica is an MBA with about 12 years of acquaintance in the industry. Theodore Jones, the new controller, has little accordant acquaintance and seems balked with the company’s new IT system. The company’s president, Andrew Cole, has a BBA and, as the founder, has formed at all levels of the business. Mr. Zachery, who is principally in allegation of the company’s accretion and accomplishment functions, meets annual with Mr. Cole, as does Frank Stevens, who has served as carnality admiral over accounts for the accomplished eight years. Accounting & Ascendancy Systems The aggregation switched to a new, chip axial accounting arrangement in early 2011. This new arrangement maintains chip inventory, accounts receivable, accounts payable, payroll, and accustomed antithesis software modules. The alteration to the new arrangement throughout aftermost year was handled mainly 4 Case 1.1: Ocean Manufacturing, Inc. by the above controller. Unfortunately, the alteration to this new arrangement was not able-bodied managed. The aggregation is still alive to acclimate it to bigger accommodated aggregation needs, to retrain the accounting staff, and to acclimate the company’s accounting controls to bigger accompaniment the system. Problems still abide in annual tracking and amount accumulation, receivables announcement and aging, amount tax deductions, payables, and antithesis area annual classifications. The aggregation chock-full alongside processing the old accounting arrangement in April 2011. During several abrupt periods throughout 2011, accustomed assay trails were not kept complete due to arrangement failures and errors fabricated by green personnel. The company’s accounting agents and administration are both balked with the bearings because, amid alternative problems, centralized administration annual reports, annual cachet reports, and receivables billings are generally backward and inaccurate, and several aircraft deadlines acquire been missed. Your appointment has never audited a aggregation with the specific IT arrangement in abode at Ocean. However, your bounded office’s IT aggregation is adequately assured they will be able to analyze Ocean’s ascendancy weaknesses and admonition Ocean affected accustomed difficulties. Accounts Receivable, Cash, and Inventories The sales/receivables arrangement handles a aggregate alignment from 2,900 to 3,400 affairs per month, including sales and payments on annual for about 1,200 alive acclaim customers. The six bigger barter currently annual for about 15% of accounts receivable, admitting the butt of the accounts ambit from $1,500 to $32,000, with an boilerplate antithesis about $8,000. Finished appurtenances inventories are organized and able-bodied protected, but in-process inventories appear somewhat beneath organized. The aggregation uses a complicated amalgam anatomy of process-costing to accrue annual costs and to account for interdepartmental in-process annual transfers for its four above artefact lines. Predecessor Auditor When you approached Frank Stevens, Ocean’s vice-president of finance, to appeal permission to allege with the antecedent auditor, he seemed afraid to altercate abundant about the above-mentioned assay firm. He explained that, in his opinion, the antecedent accountant did not acquire Ocean’s business ambiance actual able-bodied and was not technically competent to admonition the aggregation with its new IT system. He added adumbrated that the antecedent accountant and Ocean’s administration had disagreed on accessory accounting issues during the above-mentioned year’s audit. In Mr. Stevens’ opinion, the altercation was primarily due to the auditor’s abridgement of compassionate of Ocean’s business and industry environment. According to Mr. Stevens, the assay accomplice adumbrated that because of the accounting issues, he would be clumsy to affair a apple-pie assessment on the banking statements. In adjustment to acquire an amateur opinion, Ocean had to almanac assertive adjustments to revenues and receivables. Mr. Stevens believed the adjustments were accidental but acquainted affected to accomplish them to acquire a apple-pie assay opinion. Mr. Stevens acclaimed that Ocean’s administration feels assured that your firm’s cadre acquire bigger business acumen abilities and acquire the adeptness and adeptness to acquire and admonition advance Ocean’s IT system. Mr. Stevens additionally adumbrated that Ocean wants to about-face auditors at this time to adapt for the accessible IPO, acquainted that companies generally about-face to beyond accounting firms with civic reputations in alertness for activity public. Your close has been awful recommended to him by a acquaintance who is an ambassador of a hospital audited by Barnes and Fischer. Afterwards some altercation amid Mr. Stevens and Mr. Cole, Ocean’s president, they accustomed you permission to acquaintance the antecedent auditor. During your appointment with the antecedent auditor, he adumbrated that the problems his close had with Ocean primarily accompanying to (1) the complexities and problems with Ocean’s new IT arrangement and (2) management’s addiction to aggressively reflect anniversary accruals in adjustment to accommodated creditors’ requirements. The accountant additionally appear that the dissolution of the accord with Ocean was a alternate acceding amid the two parties, and that his firm’s accord with administration had been somewhat difficult about from the beginning. Apparently, the final harbinger that bankrupt the accord circuitous a altercation over the fee for the accessible audit. 5 section 1: applicant acceptance Client Accomplishments Check A assay on the accomplishments of Ocean’s administration appear that bristles years ago Ocean’s carnality admiral of accounts was answerable with a abomination involving actionable bank on bounded academy football games. According to the account reports, accuse were after alone in acknowledgment for Mr. Stevens’ accordant to pay a accomplished of $500 and accomplish 100 hours of association service. The accomplishments assay appear no alternative acknowledged or ethical problems with any alternative Ocean executives. Independence Review As allotment of Barnes and Fischer’s affection ascendancy program, every three months anniversary agent of Barnes and Fischer is adapted to book with the close an adapted acknowledgment of their claimed banal investments. You ask a agents accountant to assay the disclosures as allotment of the action of because Ocean as a abeyant client. She letters to you that there appears to be no banal buying affair except that a accomplice in Barnes and Fischer’s Salt Lake City appointment owns shares in a adventure basic armamentarium which in about-face holds a clandestine disinterestedness advance in Ocean accustomed stock. The adventure basic armamentarium holds 50,000 shares of Ocean stock, currently admired at about $18 a share. The banal is not about traded, so this amount is estimated. This advance represents aloof over a bisected of one percent of the amount of the fund’s absolute holdings. The partner’s absolute advance in the alternate armamentarium is currently admired at about $56,000. No alternative ability issues were noted. Financial Statements You acquired the accomplished three years’ banking statements from Ocean, including the unaudited statements for the best contempo year concluded December 31, 2011. This banking admonition is provided on the pages that follow. The accomplice who will be in allegation of the Ocean engagement, Jane Hunter, wants you to attending them over to see what admonition you can draw from them, advantageous accurate absorption to items that ability be accessible in free whether or not to acquire Ocean as a new assay client. 6 Case 1.1: Ocean Manufacturing, Inc. r eQ u ir e d [1] The applicant accepting action can be absolutely complex. Analyze bristles procedures an accountant should accomplish in free whether to acquire a client. Which of these bristles are adapted by auditing standards? [2] Using Ocean’s banking information, account accordant basic analytic procedures to access a bigger compassionate of the -to-be applicant and to actuate how Ocean is accomplishing financially. Compare Ocean’s ratios to the industry ratios provided. Analyze any above differences and briefly account any apropos that appear from this analysis. [3] What nonfinancial affairs should be advised afore accepting Ocean as a client? How important are these issues to the applicant accepting decision? Why? [4] [a] Ocean wants Barnes and Fischer to aid in developing and convalescent its IT system. What are the advantages and disadvantages of accepting the aforementioned CPA close accommodate both auditing and consulting services? Given accustomed accountant ability rules, will Barnes and Fischer be able to admonition Ocean with its IT arrangement and still accommodate a banking account audit? Support your cessation with adapted citations to accurate standards if your adviser indicates that you should do so. [b] As adumbrated in the case, one of the ally in addition appointment has invested in a adventure basic armamentarium that owns shares of Ocean accustomed stock. Would this bearings aggregate a abuse of ability according to the AICPA Code of Professional Conduct? Why or why not? [5] [a] Prepare a announcement to the accomplice accurate a advocacy as to whether Barnes and Fischer should or should not acquire Ocean Manufacturing, Inc. as an assay client. Anxiously absolve your position in ablaze of the admonition in the case. Accommodate application of affidavit both for and adjoin accepting and be abiding to abode both banking and nonfinancial issues to absolve your recommendation. [b] Prepare a abstracted announcement to the accomplice briefly advertisement and discussing the bristles or six best important factors or accident areas that will acceptable affect how the assay is conducted if the Ocean assurance is accepted. Be abiding to announce specific means in which the assay close should clothier its access based on the factors you identify. 7 section 1: applicant acceptance Ocean Manufacturing, Inc. Balance Sheets as of December 31, 2009-2011 (In Thousands) (Unaudited) 2011 2010 2009 $ 3,008 12,434 11,907 3,853 1,286 32,488 $ 2,171 7,936 10,487 4,843 1,627 27,064 $ 1,692 6,621 10,684 7,687 1,235 27,919 53,173 11,199 41,974 46,664 9,009 37,655 39,170 7,050 32,120 714 1,216 1,930 547 1,555 2,102 339 735 1,074 $76,392 $66,821 $61,113 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $12,285 Current allocation of abiding debt 3,535 Income tax payable 865 872 Other accustomed liabilities Total Accustomed Liabilities 17,557 $ 9,652 3,054 565 847 14,118 $12,309 2,899 295 988 16,491 LONG-TERM DEBT 20,000 17,234 11,674 TOTAL LIABILITIES 37,557 31,352 28,165 SHAREHOLDERS’ EQUITY Common banal (10,000,000 shares auth.) Additional paid-in capital Retained earnings Total Shareholders’ Equity 10,675 5,388 22,772 38,835 10,675 5,388 19,406 35,469 10,675 5,388 16,885 32,948 $76,392 $66,821 $61,113 ASSETS CURRENT ASSETS Cash Accounts receivable (net of allowance) Raw & in-process inventories Finished appurtenances inventories Other accustomed assets Total Accustomed Assets PROPERTY, PLANT, & EQUIPMENT Less accumulated depreciation Net PP&E OTHER ASSETS Deferred assets taxes Other noncurrent assets Total Alternative Assets TOTAL ASSETS TOTAL LIABILITIES AND EQUITY 8 Case 1.1: Ocean Manufacturing, Inc. Ocean Manufacturing, Inc. Statement of Antithesis for Years Concluded December 31, 2009-2011 (In Thousands) (Unaudited) 2011 2010 $145,313 $104,026 $92,835 Cost of sales 95,906 69,177 63,870 Gross profit 49,407 34,849 28,965 Operating expenses Sales 2009 41,414 28,607 24,601 Operating income 7,993 6,242 4,364 Interest expense 1,700 1,473 699 Provision for assets taxes 2,821 2,246 1,592 $3,472 $2,521 $2,073 Net Earnings Ocean Manufacturing, Inc. Statement of Retained Antithesis as of December 31, 2009-2011 (In Thousands) (Unaudited) 2011 Balance, alpha of year $19,406 2010 2009 $16,885 $14,812 Cash assets paid (106) 0 0 Net antithesis for year 3,472 2,521 2,073 Balance, end of year $22,772 $19,406 $16,885 Average Industry Ratios for Comparison Return on Disinterestedness (ROE) Return on Assets (ROA) Assets to Equity Accounts Receivable Turnover Average Collection Period Inventory Turnover Days in Inventory Debt to Equity Times Absorption Earned Current Ratio Profit Margin 2011 20.33% 6.62% 3.30 7.49 41.25 8.09 38.16 2.38 1.62 1.29 10.58% 2010 26.22% 8.10% 2.82 6.96 44.35 6.90 43.86 1.90 2.37 1.44 10.82% 9

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