Your audit firm is considering taking on as a client an Australian firm that has operated as a closely held company for its entire history. Because it is a leading exporter of wines to the United States, it is going public for the first time by registering as a public company in the United States. In addition to producing fine wines and spirits, the company has begun to expand into other beverage markets such as niche-brand soft drinks and juices. Its primary customers are grocery stores and restaurants. Management has built the business over the past several years to the point that it will require large investments in warehousing and distribution channels to meet its plans.

Discuss considerations about the potential client that you should consider before accepting the engagement and discuss what measures you might take to satisfy yourself that the potential client meets your firm's standards on each one of them (use Figure \(4-4\) as a guide).

Figure 4-4

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A. Factors within the control of the auditor 1. Expertise and staffing: Does the firm have the requisite staff available that pos- sesses or can obtain the needed expertise for completing the engagement on a timely basis in accordance with professional standards? 2. Independence: Is the firm independent of the client so as to be able to provide an opinion that is perceived to be unbiased? B. Factors which must be evaluated by the auditor 3. Integrity: Does the management of the company possess adequate integrity so that the firm can be reasonably assured that management is not knowingly com- mitting material fraud and/or illegal acts? 4. Reputation and image: Does the company have a poor reputation such that the firm's association with the client could be embarrassing or detrimental to the firm? 5. Accounting practices: Does the company have a positive attitude about complying with professional accounting standards so as to present a full and accurate portrait of the company's financial performance and status in their financial statements? 6. Financial status: Is the company in danger of ceasing operations in the near-term due to extremely poor performance or other negative factors? 7. Profitability: Can the audit firm earn a reasonable profit as a result of accepting and completing the audit engagement?