In this mini-case you will use Willis and Adams' client acceptance/continuance forms to evaluate the continuance decision for EarthWear as an audit client. One of the most important ways accounting firms manage their risk is by being very careful about which companies they decide to associate with as clients. In the first year, that decision is referred to as the client acceptance decision. In each subsequent year, firms decide whether to continue their association with each client. This subsequent decision process is referred to as the continuance decision. The factors that firms consider for the continuance decision are usually very similar to those considered for the initial acceptance decision.

INSTRUCTIONS:

Read the background information on EarthWear to prepare to evaluate the company as a continuing audit client. To open the background document please double-click on the following icon (a document will open in Microsoft Word).

Review EarthWear's unaudited 2016 financial statements including the "Balance Sheet", "Income Statement", and "Cash Flow" worksheets to obtain a better understanding of the client and to assess its current financial condition. A senior auditor from your firm has already calculated some financial and industry ratios to help with the continuance decision. Compare EarthWear's ratios to the industry ratios provided on the "Ratios" worksheet. Pay particular attention to items that might be helpful in determining whether or not to continue with EarthWear as an audit client.

Review the Willis and Adams' client acceptance/continuance forms Work Papers 3-1, 3-2, 3-3, and 3-4, which have already been completed.

Complete the remaining questions on Work Paper 3-5 using information from the background and financial statement information.
Fields you are to complete on the form are colored yellow. The color will disappear as the field is completed.