INTRODUCTION Your accounting firm is a medium-sized, national CPA firm with over 6,000 professionals. It is mid-January 2021, and you have been promoted to audit manager of the Pacific Northwest office. Your first assignment is to help an audit partner on a client acceptance decision. The partner explains to you that the prospective client, Angeli Manufacturing, is a medium-sized manufacturer of small home appliances. The companys president indicated that, after some difficult negotiations, the company decided to terminate its relationship with its current auditor, and that the main reason for the switch was that they hope to build a relationship with a more nationally established CPA firm. The company has indicated that they plan to make an initial public offering of its common stock within the next few years. Their annual financial statements have been audited each of the past 12 years in order to comply with debt covenants. The partner is intrigued about the idea of having a client in the home appliance industry. There are several home appliance manufacturers in the area, but your office has never had a client in the industry. Most of your firms audit clients are in the healthcare services industry. The partner feels this is an excellent opportunity for the firm 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 OF ANGELI MANUFACTURING Angeli Manufacturing manufactures small- to medium-sized home appliances. Although their common stock is not publicly traded, they are planning an IPO in the next few years in hopes that it will be able to trade Angelis common stock on the NASDAQ. You have been assigned to gather information in order to make a recommendation on whether your firm should accept Angeli as a client.

Angeli wants to hire your firm to issue an opinion on its December 31, 2020 financial statements. Angelis unaudited December 31, 2020 financial statements report total assets of $76 million, sales revenue of $145 million, and net profit of $3.4 million. In the past, the company has not attempted to expand aggressively or develop new product lines. Rather, it has concentrated on maintaining steady growth by providing reliable products within a moderate to low price range. However, Angeli hopes to use the capital from the upcoming IPO to aggressively expand into from a regional to a national market.

Though shaken by recent management turnover and ongoing difficulties with the companys new accounting system, management feels that Angeli is in a position to grow considerably. Management notes that earnings have increased substantially each year over the past three years and that Angelis products have received increasing acceptance in the small appliance marketplace. Three years ago, the company received a qualified opinion relating to revenues and receivables. Angeli has changed auditors three times over the past 12 years. Management

In October 2020, 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 their leaving was disclosed by management as being related to personal issues. A new vice-president over operations was hired in November. She has an MBA and almost 12 years of experience in the industry. The new controller joined early last month. He has little relevant experience and seems frustrated with the companys new IT system. The companys president has a BBA and has worked at all levels of the business. The vice president over finance has been in that position for the past eight years. The president, vice-president over finance, as well as the manager in charge of procurement and manufacturing functions all three meet together each week.

Predecessor Auditor

When you approached the companys 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 Angelis 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 Angelis management had disagreed on minor accounting issues during the prior years audit. In his opinion, the disagreement was primarily due to the auditors lack of understanding of Angelis business and industry environment. According to the vice-president of finance, the previous auditor felt 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, Angeli had to record certain adjustments to revenues and receivables. After some discussion between the vice-president over finance and the Angelis president, you are granted permission to contact the previous auditor.

During your visit with the previous auditor, he indicated that the problems his firm had with Angeli primarily related to the complexities and problems with Angelis new IT system and managements tendency to aggressively reflect year-end accruals and revenue in order to meet creditors requirements. The auditor disclosed that the dissolution of the relationship with Angeli was a mutual agreement and that his firms 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 check on the background of Angelis management revealed that five years ago, Angelis vice-president of finance was charged with a misdemeanor involving illegal gambling on local college football games. The background check revealed no other legal or ethical problems with any other Angeli executives. Independence Review

There appears to be no stock ownership issue except that a partner in your firms Utah office owns shares in a venture capital fund which in turn owns a private investment in Angeli common stock. The venture capital fund holds 50,000 shares of Angeli stock, currently valued at approximately $18 per share. The stock is not publicly traded, so this value is estimated. This investment represents just over half of one percent of the value of the funds total holdings. The firms partners total investment in the mutual fund is currently valued at about $56,000.

Required:

Prepare a memo to the partner, making a recommendation as to whether your firm should or should not accept Angeli Manufacturing as an audit client. Assume some of the other partners could read this and would be seeing all information regarding this client for the first time, so we want this memo to address all relevant information as if it is new information to the partner reading the memo (In other words, be completemake it to where it will not be necessary for any of the partners to need to go beyond this document for background or clarification. Make it a one-stop shop.).

As you are drafting the memo, be sure to consider the following:

-identify and concisely describe any potential opportunities and problems -use and cite relevant standards when necessary (example: for the potential independence issue) -use unambiguous language -present information completely but concisely -make sure your communication has a logical flow - consider reasons both for and against acceptance