audit case question.

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Introduction

The accounting firm of Barnes and Fischer, LP, is a medium-sized, national Certified Accountant firm.

The partnership, formed in 1954, now has over 6,000 professionals on the payroll. The firm mainly provides

auditing and tax services, but it has recently had success building the information systems consulting side of the

business for non-audit clients and for audit clients that are not publicly traded.

It is mid-January 201S, and you are a newly promoted audit manager in an office of Barnes and Fischer,

located in the Pacific Northwest. You have been a senior auditor for the past three of your five years with Barnes

and Fischer. Your first assignment as audit manager is to assist an audit partner on a client acceptance decision. The

partner explains to you that the prospective client, Green Manufacturing, is a medium-sized manufacturer of small

home appliances. The partner recently met the company's president at a local chamber of commerce meeting. The

president indicated that (after some difficult negotiations, the company has decided to terminate its relationship with

its current auditor, The president explained that the main reason for the switch is to build a relationship with a more

nationally established Certified Accountant firm because the company plans to make an initial public offering (IPO)

of its common stock within the next few years. Green's annual financial statements have been audited each of the

past 12 years in order to comply with debt covenants and to receive favorable interest rates on the company's

existing line of credit. Because the company's December 31 fiscal year-end has already passed, time is of the

essence for the company to contract with a new auditor to get the audit under way.

The partner, Jane Hunter, is intrigued with the idea of having a client in the home appliance industry,

especially one with the favorable market position and growth potential of Green Manufacturing. Although there are

several manufacturers of small home appliances in the area, your office has never had a client in the industry. Most

of your office's current audit clients are in the healthcare services industry. Thus, the partner feels the engagement

presents an excellent opportunity for Barnes and Fischer to enter a new market. On the other hand, knowing the

risks involved, the partner wants to make sure the client acceptance decision is carefully considered.

Background

Green Manufacturing, Inc. manufactures small- to medium-sized home appliances. The company's

products include items like toasters, blenders, and trash compactors. Although Green's common stock and other

securities are not publicly traded, the company is planning an IPO in the next few years in hopes that it will be able

to trade Green's common stock on the NASDAQ. You have been assigned to gather information in order to make

a recommendation on whether your firm should accept Green Manufacturing as a client.

Green wants to hire your firm to issue an opinion on its December 31, 2014 financial statements and has

expressed interest in obtaining help to get its recently installed information technology (IT) system in better shape.

Green also wants your firm's advice and guidance on getting everything in order for the upcoming IPO. During the

initial meeting with Green's management, the following information was obtained about the industry and the

company.

The Home Appliances Industry

Over the past several years, the domestic home appliances industry has been growing at a steady pace. The

industry consists of a wide variety of manufacturers (domestic and foreign) who sell to a large number of wholesale

and retail outlets. Though responsive to technological improvements, product marketability is linked to growth in

the housing market. Retail outlets are served by both wholesale and manufacturer representatives.

Green Manufacturing, Inc

Green's unaudited December 31, 2014 financial statements report total assets of $76 million, sales revenues

of $156 million, and net profit of $3.9 million. In the past, the company has not attempted to expand aggressively

or develop new product lines. Rather, it has concentrated on maintaining a steady growth rate by providing reliable

products within a moderate to low price range. However, Green hopes to use the capital from the upcoming IPO to

aggressively expand from a regional to a national market. Green primarily sells its products in small quantities to

individually owned appliance stores. Over the last few years the company has begun to supply larger quantities to

three national retail chains. Two of these larger retailers started buying Green's products about two years ago. In

order to handle the increased sales, Green significantly expanded its manufacturing capacity. Though shaken by recent management turnover and ongoing difficulties with the company's new

accounting system, management feels that Green is in a position to grow considerably. Management notes that

opinion relating to revenues and receivables. Green has changed auditors three times over the past 12 years.

Management

In October 2014, the company experienced significant management turnover when both the vice-president

of operations and the controller resigned to take jobs in other cities. The reason for them leaving was disclosed by

management as being related to "personal issues." A new vice-president, Jessica Wood, was hired in November,

and the new controller joined early last month. Jessica is an MBA with almost 12 years of experience in the industry.

Theodore Jones, the new controller. has little relevant experience and seems frustrated with the company's new IT

system. The company's president, Andrew Cole, has a BBA and, as the founder, has worked at all levels of the

business. Mr. Zachery, who is principally in charge of the company's procurement and manufacturing functions,

meets weekly with Mr. Cole, as does Frank Stevens, who has served as vice president over finance for the past eight

years.

657

Accounting & Control Systems

The company switched to a new, integrated central accounting system in early 2014. This new system

maintains integrated inventory, accounts receivable, accounts payable, payroll, and general ledger software

modules. The transition to the new system throughout last year was handled mainly by the former controller.

Unfortunately, the transition to this new system was not well managed. The company is still working to modify it

to better meet company needs, to retrain the accounting staff, and to adapt the company's accounting controls to

better complement the system.

Problems still exist in inventory tracking and cost accumulation, receivables billing and aging, payroll tax

deductions, payables, and balance sheet account classifications. The company stopped parallel processing the old

accounting system in April 2014. During several brief periods throughout 2014, conventional audit trails were not

kept intact due to system failures and errors made by untrained personnel.

The company's accounting staff and management are both frustrated with the situation because, among

other problems, internal management budget reports, inventory status reports, and receivables billings are often late

and inaccurate, and several shipping deadlines have been missed.

Your office has never audited a company with the specific IT system in place at Green. However, your

local office's IT team is fairly confident they will be able to diagnose Green's control weaknesses and help Green

overcome current difficulties.

Accounts Receivable, Cash, and Inventories

The sales/receivables system handles a volume ranging from 2,900 to 3,400 transactions per month

including sales and payments on account for about 1,200 active credit customers. The six largest customers currently

account for about 15% of accounts receivable, whereas the remainder of the accounts range from $1,500 to $32,000,

with an average balance around $8.900.

Finished goods inventories are organized and well protected, but in-process inventories appear somewhat

less organized. The company uses a complicated hybrid form of process-costing to accumulate inventory costs and

to account for interdepartmental in-process inventory transfers for its four major product lines.

Predecessor Auditor

When you approached Frank Stevens, Green's vice-president of finance, to request permission to speak

with the previous auditor, he seemed hesitant to discuss much about the prior audit firm. He explained that, in his

opinion, the previous auditor did not understand Green's business environment very well and was not technically

competent to help the company with its new IT system. He further indicated that the predecessor auditor and Green's

management had disagreed on minor accounting issues during the prior year's audit. In Mr. Stevens' opinion, the

disagreement was primarily due to the auditor's lack of understanding of Green's business and industry

environment. According to Mr. Stevens, the audit partner indicated that because of the accounting issues, he would

be unable to issue a clean opinion on the financial statements. In order to receive an unqualified opinion, Green had

to record certain adjustments to revenues and receivables. Mr. Stevens believed the adjustments were unnecessary

but felt forced to make them to receive a clean audit opinion. Mr. Stevens noted that Green's management feels confident that your firm's personnel possess better

business judgment skills and have the knowledge and ability to understand and help improve Green's IT system.

Mr. Stevens also indicated that Green wants to switch auditors at this time to prepare for the upcoming IPO, noting

that companies often switch to larger accounting firms with national reputations in preparation for going publie.

Your firm has been highly recommended to him by a friend who is an administrator of a hospital audited by Barnes

and Fischer. After some discussion between Mr. Stevens and Mr. Cole, Green's president, they granted you

permission to contact the previous auditor.

During your visit with the previous auditor, he indicated that the problems his firm had with Green primarily

related to (1) the complexities and problems with Green's new IT system and (2) management's tendency to

aggressively adjust year-end accruals in order to meet creditors' requirements. The auditor also disclosed that the

dissolution of the relationship with Green was a mutual agreement between the two parties, and that his firm's

relationship with management had been somewhat difficult almost from the beginning. Apparently, the final straw

that broke the relationship involved a disagreement over the fee for the upcoming audit.

Client Background Check

A background check on Green's management revealed that five years ago Green's vice president of finance

was charged with a misdemeanor involving illegal gambling on local college football games. According to the news

reports, charges were later dropped in return for Mr. Stevens agreeing to pay a fine of $500 and to perform 100

hours of community service. The background check revealed no other legal or ethical problems with any other

Green executives.

Independence Review

As part of Barnes and Fischer's quality control program, each employee of Barnes and Fischer is required

to file with the firm an updated disclosure of their personal stock investments every three months. You ask a staff

auditor to review the disclosures as part of the process of considering Green as a potential client. She reports to you

that there appears to be no stock ownership issue except that a partner in Barnes and Fischer's Salt Lake City office

owns shares in a venture capital fund which in turn holds a private equity investment in Green common stock. The

venture capital fund holds 50,000 shares of Green stock, currently valued at approximately $18 a share. The stock

is not publicly traded, so this value is estimated. This investment represents just over a half of one percent of the

value of the fund's total holdings. The partner's total investment in the mutual fund is currently valued at about

$56,000. No other independence issues were noted.

Financial Statements

You acquired the past three years' financial statements from Green, including the unaudited statements for

the most recent year ended December 31, 2014. This financial information is provided on the pages that follow.

The partner who will be in charge of the Green engagement, Jane Hunter, wants you to look them over to see what

information you can draw from them, paying particular attention to items that might be helpful in determining

whether or not to accept Green as a new audit client.

Required:

1. The client acceptance process can be quite complex. Identify procedures an auditor should perform in

determining whether to accept a client?

2.

What nonfinancial matters should be considered before accepting Green as a client? How important are

these issues to the client acceptance decision? Why?

3.

Using Green's financial information, calculate relevant preliminary analytical procedures to obtain a better

understanding of the prospective client and to determine how Green is doing financially. Compare Green's

ratios to the industry ratios provided. Identify any major differences and briefly list any concerns that arise

from this analysis.

4.

Prepare a memo to the partner making a recommendation as to whether Barnes and Fischer should or should

not accept Green Manufacturing, Inc. as an audit client. Carefully justify your position in light of the

information in the case. Include consideration of reasons both for and against acceptance and be sure to

address both financial and nonfinancial issues to justify your recommendation

Frece Nanufarturing. Inc. The New Clietit Aeceptarse Becision Infroduction The accountins finn of Barnes and Hischer. L.P., is a meclum-sized, national Centified Accountant firm The purmentip, formed in 1954, now has ever 6,000 peofessionats on the payroll. The fim mainly provides auditiag and ux aervices, but it his recently had wucces huildiag the information sysuemis coesubling side of the business for non-aucitit clients and for asdit clients thas are not poblicly traded. It is mid.Jannary 2015, and you are a newly procioted mudit manaiger in an office of Burnes and Fischer. located in the Pacific Nortliwest. You bave been a senior auditor for the past three of your five years with Barnes. and Fischer. Your first assignment as audit manager is to assist an audit partser on a elient acceptance decision. The partner explains to you that the prospective clien, Green Manufacturing, is a medruti-sized mianufacturet of small home appiiances. The partner recently met the company's president at a local chamber of commerse meeting. The president indicated that (after some difficult negotiations, the company has decided to teinaingte its relationship with ias current mifitoc. The presidert explained that the main reason for the switch is fo build a relationship with a moce of its common sock within the next few years. Green's annual financial statements have been audited each of the past 12 years in order to comply with debt covenants and to receive favotable interest rates on the company's existing line of credit. Because the company's December 31 fiscal year-cnd has already passed, time is of the essence for the company to contract with a new auditor to get the audit under way. The partner, Jane Hunter, is intrigued with the idea of having a client in the home appliance industry, especially one with the favorable market position and growth potertial of Green Manufacturing. Althouph thate are several manufacturers of small home appliances ia the area. your office lins never had a client in the industry, Mout of your office's curreat audit clients are in the bealtheare serviees industry. Thus, the partner feels the engagement presents an excellent opportunity for Bames and Fischer to enter a new market. On the other hand, knowing the risks involved, the partner wants to make sure the client acceptance decision is carefully considered. Background Green Manufacturing. Inc. manufactures stnall- to medium-sized home appliances. The company's products include items like toasters, blenders, and trash compactors. Although Green's common stock and other securities are not publicly traded, the company is planning an IPO in the next few years in hopes that it will be able to trade Green's cormmon stock on the NASDAQ. You have been assigned to gather information in order to make a recommendation on whether your firm should accept Green Manufacturing as a client. Green wants to hire your firm to issue an opiaion on its December 31.2014 financial statements and has expressed interest in obtaining help to get its recently installed information technology (IT) system in better shape. Green also wants your firm's advice and guidance on getting everything in order for the upeoming IPO. During the initial meeting with Green's management, the following information was obtained about the industry and the company. The Home Appliances Industry Over the past several years, the donnestic home appliances industry has been growing at a steady pace. The industry consists of a wide variety of manufacturers (domestic and foreign) who sell to a large number of wholesale and retail outlets. Though responsive to technological improvements, product marketability is linked to growth in the housing market. Retail outlets are served by both wholesale and manufacturer representatives. Green Manufacturing, Inc Green's unaudited December 31,2014 financial statements report total assets of $76 million, sales revenues of $156 million, and net profit of $3.9 million. In the past, the company has not attempted to expand aggressively or develop new product lines. Rather, it has concentrated on maintaining a steady growth rate by providing reliable products within a moderate to low price range. However, Green hopes to use the capital from the upcoming IPO to aggressively expand from a regional to a national market. Green primarily sells its products in small quantities 10 . individually owned appliance stores. Over the last few years the company has begun to supply larger quantities to three national retail chains. Two of these larger retailers started buying Green's products about two years ago. In order to handle the increased sales, Green significantly expanded its manufacturing capacity. increasing accepense in the small appliance markeplace (Thiceycans apo, the company roccived a gualified audia oginion relating to revenwes and teceivables. Groen las charged auditors tiree times over the past is yeari. Management In Ocwber 2014, the company expericnced sipnificant management furnover when both the vice. presiden of operations and the controller rewigned to take jobs in odber cities. The reason for them feaving wak ditctined by manageieicat as being related to "personal issucs." A new vice-president, Jesvica Wood, Was hired in November. and the new controller joined carly last month. Jensica is an MBA with almost 12 years of experience in the indiastry: Theodore Jones, the new controller, has little relevant experience and seems frustrated with the cormpany's new IT system. The company's president, Andrew Cole, has a BBA and, as the founder, has wotked at ail levels of the business. Mr. Zachery, who is principally in cbarge of the company's procurement and manufacturing functions, meets weekly with Mr. Cole, as does Frank Stevens, who has served as vice president over finance for the past eight years: Accounting \& Control Systems The company swifched to a new, integgated central accounting system in early 2014 . This new system maintains integrated inveritory, accounts receivable, accounts payable, payrofl, and general ledger software modules. The transition to the new syseen throughout last year was handed mainly by the former eontroller. Unfortunately, the transition to this new system was not well managed. The company is still working to modify a to better meet company needs, to retrain the accounting staff, and to adapt the company's accounting controls to betier complement the system. Problems still exist in inventory tracking and cost accumulation, receivables billing and aging. payroll tax deductions, payables, and balance sheet accoant classifications. The company stopped parallel processing the old accounting system in April 2014. During several brief periods throughout 2014, conventional audit trails were not kept intact due to system failures and errors made by untrained personnel. The company's accounting staff and management are both frustrated with the situation because, among other problems, internal management budget reports, inventory status reports, and receivables billings are often late and inaccurate, and several shipping deadlines have been missed. Your office has never audited a company with the specifie IT sysem in place at Green. However. your local office's IT team is fairly confident they will be able to diagnose Green's control weaknesses and belp Green overcome current difficulties. Accouats Receivable, Cash, and Inventories The sales/reccivables system handles a volume ranging from 2,900 to 3,400 transactions per month, including sales and payments on account for about 1,200 active credit customers. The six largest customers cutrently accoant for about 15% of accounts receivable, whereas the remainder of the accounts range from $1,500 to $32,000, with an average balance around $8,900. Finished goods inventories are organized and well protected, but in-process inventories appear somewhat less organized. The company uses a complicated hybrid form of process-costing to accumulate inventory costs and to account for interdepartmental in-process inventory transfers for its four major product lines. Predecessor Auditor When you approaehed Frank Stevens, Green's vice-president of finance, to request permission to speak. with the previous auditor, he seemed hesitant to discuss much about the prior audit firm. He explained that, in his opinion, the previous auditor did not understand Green's business environment very well and was not technicalh competent to help the company with its new IT system. He further indicated that the predecessor auditor and Giecr's management had disagreed on minor accounting issues during the prior year's audit. In Mr. Stevens' opinion, the disagreement was primarily due to the auditor's lack of understanding of Green's business and industry environment. According to Mr. Stevens, the audit partner indicated that because of the accounting isstes, he would be unable to issue a clean opinion on the financial statements. In order to receive an unqualified opinion, Green hasd to record certain adjustments to revenues and receivables. Mr. Stevens believed the adjustments were tuncecssiny bat felt forced to make them to receive a clean audit opinion. permission to contact the previous auditor. During your visit with the previoes audstor, he indicated that the problems his firm had with Cireen primarily related to (1) the complexities and problems with Green's new IT system and (2) ranagcmett's tendency to aggressively adjust ycar-end accruals in order to meet creditors' requirements. The auditor also disclosed that the discolution of the relationship with Green was a mutual agreement between the two parties. and nlasedis firm's relationship with management had beea sonewhat difficult almost from the beginning. Apparently, the final siraw that broke the relationship involved a disagrecment over the fee for the upceming aodit. Client Background Cbeek A backpround check on Green's manageiaent revealed that five years sgo Green's vice gresident of finance was charged with a misdemcanor involvang tllegal gambling oa local college football games. According to the news reports, charges were later dropped in retura for Mr. Sievens agrecing to pay a fine of $500 and to perform 100 hours of community service. The background check revealed no other legal or ethical problems with any other Given executives; Independence Review As part of Barnes and Fischer's quality eontrol program, each employee of Barnes and Fisctier is required to file with the firm an updated disclosure of their personal stock. investments every three months. You ask a saff auditor to revicw the distlostares as part of the process of considering Gireen as a potential client. She teports 20 you that there appears to be no stock ownership issue except that a partner in Barnes and Fischer's Salt lake Ciry office owns shares in a venture capital fund which in tarn holds a private equity investment in Gireen commen stock. The venfure capital fund holds 50,000 shares of Green stock, currently valued at approximately St8 a share. The stock is not publicly traded, so this value is estimated. This investment represents just over a half of otve percent of the value of the fund's total holdings. The partner's total investanent in the mutual fund is currently valued at about $56,000, No other independence issues were noted. Financial Statements. You acquired the past three years" financial statements from Green, including the unautited statements forthe most recent year ended December 31. 2014. This fimancial infoamation is provided on the pages that follow, The partner who will be in clarge of the Green engagement, Jane Hunter, wants you to look them over to see what information you can draw from them, paying particular attention to items that might be helpful in determining whether of not to accept Green as a new audit client. Required: 1. The client acceptance process can be quite complex. Identify procedures an auditor should perform i determining whether to accept a client? 2. What nonfinancial matters should be considered before accepting Green as a client? How important a these issues to the client acceptance decision? Why? 3. Using Green's financial information, calculate relevant preliminary analytical procedures to obtain a be understanding of the prospective client and to determine how Green is doing financially. Compare Grec ratios to the industry ratios provided. Identify any major differences and briefly list-iny concerns that a from this analysis. 4. Prepare a memo to the partner making a recommendation as to whether Barnes and Fischer should ot sh not accept Green Manufacturing, Ine. as an audit client. Carefully justify your position in tight o information in the case. Include consideration of reasons both for frid against acceptance and be st address both financial and nonfinancial issues to justify your recommendation: Frece Nanufarturing. Inc. The New Clietit Aeceptarse Becision Infroduction The accountins finn of Barnes and Hischer. L.P., is a meclum-sized, national Centified Accountant firm The purmentip, formed in 1954, now has ever 6,000 peofessionats on the payroll. The fim mainly provides auditiag and ux aervices, but it his recently had wucces huildiag the information sysuemis coesubling side of the business for non-aucitit clients and for asdit clients thas are not poblicly traded. It is mid.Jannary 2015, and you are a newly procioted mudit manaiger in an office of Burnes and Fischer. located in the Pacific Nortliwest. You bave been a senior auditor for the past three of your five years with Barnes. and Fischer. Your first assignment as audit manager is to assist an audit partser on a elient acceptance decision. The partner explains to you that the prospective clien, Green Manufacturing, is a medruti-sized mianufacturet of small home appiiances. The partner recently met the company's president at a local chamber of commerse meeting. The president indicated that (after some difficult negotiations, the company has decided to teinaingte its relationship with ias current mifitoc. The presidert explained that the main reason for the switch is fo build a relationship with a moce of its common sock within the next few years. Green's annual financial statements have been audited each of the past 12 years in order to comply with debt covenants and to receive favotable interest rates on the company's existing line of credit. Because the company's December 31 fiscal year-cnd has already passed, time is of the essence for the company to contract with a new auditor to get the audit under way. The partner, Jane Hunter, is intrigued with the idea of having a client in the home appliance industry, especially one with the favorable market position and growth potertial of Green Manufacturing. Althouph thate are several manufacturers of small home appliances ia the area. your office lins never had a client in the industry, Mout of your office's curreat audit clients are in the bealtheare serviees industry. Thus, the partner feels the engagement presents an excellent opportunity for Bames and Fischer to enter a new market. On the other hand, knowing the risks involved, the partner wants to make sure the client acceptance decision is carefully considered. Background Green Manufacturing. Inc. manufactures stnall- to medium-sized home appliances. The company's products include items like toasters, blenders, and trash compactors. Although Green's common stock and other securities are not publicly traded, the company is planning an IPO in the next few years in hopes that it will be able to trade Green's cormmon stock on the NASDAQ. You have been assigned to gather information in order to make a recommendation on whether your firm should accept Green Manufacturing as a client. Green wants to hire your firm to issue an opiaion on its December 31.2014 financial statements and has expressed interest in obtaining help to get its recently installed information technology (IT) system in better shape. Green also wants your firm's advice and guidance on getting everything in order for the upeoming IPO. During the initial meeting with Green's management, the following information was obtained about the industry and the company. The Home Appliances Industry Over the past several years, the donnestic home appliances industry has been growing at a steady pace. The industry consists of a wide variety of manufacturers (domestic and foreign) who sell to a large number of wholesale and retail outlets. Though responsive to technological improvements, product marketability is linked to growth in the housing market. Retail outlets are served by both wholesale and manufacturer representatives. Green Manufacturing, Inc Green's unaudited December 31,2014 financial statements report total assets of $76 million, sales revenues of $156 million, and net profit of $3.9 million. In the past, the company has not attempted to expand aggressively or develop new product lines. Rather, it has concentrated on maintaining a steady growth rate by providing reliable products within a moderate to low price range. However, Green hopes to use the capital from the upcoming IPO to aggressively expand from a regional to a national market. Green primarily sells its products in small quantities 10 . individually owned appliance stores. Over the last few years the company has begun to supply larger quantities to three national retail chains. Two of these larger retailers started buying Green's products about two years ago. In order to handle the increased sales, Green significantly expanded its manufacturing capacity. increasing accepense in the small appliance markeplace (Thiceycans apo, the company roccived a gualified audia oginion relating to revenwes and teceivables. Groen las charged auditors tiree times over the past is yeari. Management In Ocwber 2014, the company expericnced sipnificant management furnover when both the vice. presiden of operations and the controller rewigned to take jobs in odber cities. The reason for them feaving wak ditctined by manageieicat as being related to "personal issucs." A new vice-president, Jesvica Wood, Was hired in November. and the new controller joined carly last month. Jensica is an MBA with almost 12 years of experience in the indiastry: Theodore Jones, the new controller, has little relevant experience and seems frustrated with the cormpany's new IT system. The company's president, Andrew Cole, has a BBA and, as the founder, has wotked at ail levels of the business. Mr. Zachery, who is principally in cbarge of the company's procurement and manufacturing functions, meets weekly with Mr. Cole, as does Frank Stevens, who has served as vice president over finance for the past eight years: Accounting \& Control Systems The company swifched to a new, integgated central accounting system in early 2014 . This new system maintains integrated inveritory, accounts receivable, accounts payable, payrofl, and general ledger software modules. The transition to the new syseen throughout last year was handed mainly by the former eontroller. Unfortunately, the transition to this new system was not well managed. The company is still working to modify a to better meet company needs, to retrain the accounting staff, and to adapt the company's accounting controls to betier complement the system. Problems still exist in inventory tracking and cost accumulation, receivables billing and aging. payroll tax deductions, payables, and balance sheet accoant classifications. The company stopped parallel processing the old accounting system in April 2014. During several brief periods throughout 2014, conventional audit trails were not kept intact due to system failures and errors made by untrained personnel. The company's accounting staff and management are both frustrated with the situation because, among other problems, internal management budget reports, inventory status reports, and receivables billings are often late and inaccurate, and several shipping deadlines have been missed. Your office has never audited a company with the specifie IT sysem in place at Green. However. your local office's IT team is fairly confident they will be able to diagnose Green's control weaknesses and belp Green overcome current difficulties. Accouats Receivable, Cash, and Inventories The sales/reccivables system handles a volume ranging from 2,900 to 3,400 transactions per month, including sales and payments on account for about 1,200 active credit customers. The six largest customers cutrently accoant for about 15% of accounts receivable, whereas the remainder of the accounts range from $1,500 to $32,000, with an average balance around $8,900. Finished goods inventories are organized and well protected, but in-process inventories appear somewhat less organized. The company uses a complicated hybrid form of process-costing to accumulate inventory costs and to account for interdepartmental in-process inventory transfers for its four major product lines. Predecessor Auditor When you approaehed Frank Stevens, Green's vice-president of finance, to request permission to speak. with the previous auditor, he seemed hesitant to discuss much about the prior audit firm. He explained that, in his opinion, the previous auditor did not understand Green's business environment very well and was not technicalh competent to help the company with its new IT system. He further indicated that the predecessor auditor and Giecr's management had disagreed on minor accounting issues during the prior year's audit. In Mr. Stevens' opinion, the disagreement was primarily due to the auditor's lack of understanding of Green's business and industry environment. According to Mr. Stevens, the audit partner indicated that because of the accounting isstes, he would be unable to issue a clean opinion on the financial statements. In order to receive an unqualified opinion, Green hasd to record certain adjustments to revenues and receivables. Mr. Stevens believed the adjustments were tuncecssiny bat felt forced to make them to receive a clean audit opinion. permission to contact the previous auditor. During your visit with the previoes audstor, he indicated that the problems his firm had with Cireen primarily related to (1) the complexities and problems with Green's new IT system and (2) ranagcmett's tendency to aggressively adjust ycar-end accruals in order to meet creditors' requirements. The auditor also disclosed that the discolution of the relationship with Green was a mutual agreement between the two parties. and nlasedis firm's relationship with management had beea sonewhat difficult almost from the beginning. Apparently, the final siraw that broke the relationship involved a disagrecment over the fee for the upceming aodit. Client Background Cbeek A backpround check on Green's manageiaent revealed that five years sgo Green's vice gresident of finance was charged with a misdemcanor involvang tllegal gambling oa local college football games. According to the news reports, charges were later dropped in retura for Mr. Sievens agrecing to pay a fine of $500 and to perform 100 hours of community service. The background check revealed no other legal or ethical problems with any other Given executives; Independence Review As part of Barnes and Fischer's quality eontrol program, each employee of Barnes and Fisctier is required to file with the firm an updated disclosure of their personal stock. investments every three months. You ask a saff auditor to revicw the distlostares as part of the process of considering Gireen as a potential client. She teports 20 you that there appears to be no stock ownership issue except that a partner in Barnes and Fischer's Salt lake Ciry office owns shares in a venture capital fund which in tarn holds a private equity investment in Gireen commen stock. The venfure capital fund holds 50,000 shares of Green stock, currently valued at approximately St8 a share. The stock is not publicly traded, so this value is estimated. This investment represents just over a half of otve percent of the value of the fund's total holdings. The partner's total investanent in the mutual fund is currently valued at about $56,000, No other independence issues were noted. Financial Statements. You acquired the past three years" financial statements from Green, including the unautited statements forthe most recent year ended December 31. 2014. This fimancial infoamation is provided on the pages that follow, The partner who will be in clarge of the Green engagement, Jane Hunter, wants you to look them over to see what information you can draw from them, paying particular attention to items that might be helpful in determining whether of not to accept Green as a new audit client. Required: 1. The client acceptance process can be quite complex. Identify procedures an auditor should perform i determining whether to accept a client? 2. What nonfinancial matters should be considered before accepting Green as a client? How important a these issues to the client acceptance decision? Why? 3. Using Green's financial information, calculate relevant preliminary analytical procedures to obtain a be understanding of the prospective client and to determine how Green is doing financially. Compare Grec ratios to the industry ratios provided. Identify any major differences and briefly list-iny concerns that a from this analysis. 4. Prepare a memo to the partner making a recommendation as to whether Barnes and Fischer should ot sh not accept Green Manufacturing, Ine. as an audit client. Carefully justify your position in tight o information in the case. Include consideration of reasons both for frid against acceptance and be st address both financial and nonfinancial issues to justify your recommendation