Sharon Gallagher, Josh Thomas, and Jo Wadley are members of the audit firm W&S Partners. Sharon is the audit manager and Josh is the audit senior assisting the partner, Jo Wadley, evaluate the decision to accept the Cloud 9 Ltd. (Cloud 9) audit engagement for the year ended December 31, 2012.
Background information about the company is presented in Appendix B of this book. In addition, Josh has discovered the following facts and has requested your help to document and assess the factors that affect the client acceptance decision.
The finance director of Cloud 9, David Collier, is married to a distant relation of P S. Nethercott, a partner in W&S Partners' consulting department.
The consulting department at W&S Partners has quoted on an IT installation project at Cloud 9. The fees from this project, if the tender is successful, would be twice the size of the audit fee.
A survey of audit staff at W&S Partners has revealed that 30 percent have purchased Cloud 9's products (basketball shoes) in the past.
Four members of the IT department at W&S Partners have shares in retailers that sell Cloud 9's products. In each case, the shareholdings were disclosed on the firm's share register, and the size of the shareholding is deemed material under W&S Partners' ethical guidelines.
An article in a newspaper published in Canada has claimed that Cloud 9 Inc. (Cloud 9's parent company) was secretly running "third-world sweat shops." The article alleged that shoes made by other wholly owned subsidiaries of Cloud 9 Inc. in China and Brazil were using illegal child labor in factories that did not meet local health and safety rules. Cloud 9 Inc. has vehemently disputed the accuracy of the article, suggesting that it was planted by a rival company. Cloud 9 Inc. has invited international advocacy groups to visit its factories at any time.
Required
Answer the following questions based on the information presented above, in Appendix B of this book, and throughout chapters 1 and 2. Consider your answers to the case study questions in chapter 1 where relevant.
(a) Prepare a document that explains the impact, if any, of each piece of information relevant to your client acceptance decision for Cloud 9.
(b) List and explain any additional actions you would take before making your client acceptance recommendation to the partner, Jo Wadley.
(c) Assume the decision is made to accept Cloud 9 as a client. Prepare the client engagement letter.