QUESTION 1: NEW CLIENT ACCEPTANCE AND AUDIT PLANNING [45 Marks]

Evaluate whether you should accept Russell Ltd as your audit client. Present your answer in the given format below. [18 marks]

Factors for evaluating a new client	Explain why the factor needs to be considered	How does this factor impact on your client acceptance decision

Based on your analysis above, explain whether you would accept Russell Ltd as a client.

Background of Russell Ltd

We have a fairly good year, said the Managing Director (MD), John Claddy of Russell Ltd. The sales for this year exceeded $2 million for the first time in our history, though net profit didn't keep pace with the sales increase because of higher labour costs.

Russell Ltd is a manufacturing company. Its factory is located in Greymouth, including a sales branch and warehouse facilities. The company also have sales branches in Auckland, Wellington, Christchurch, Perth and Adelaide. It currently exports to Indonesia and India. The company is looking into selling to China and South Korea to expand its markets. It has over 80 full-time employees. The factory is owned by Russell Ltd and the sales branches are on leased premises.

The company products are specialised industrial chemicals divided into 'Product Line A' and 'Product Line B'. Due to the technical developments and competitive industry the products are subject to a substantial obsolescence risks. If a product becomes obsolete, the company is often able to sell the chemicals to other manufacturers for their use. However, Russell Ltd will generally only receive 40c in a dollar for the product.

Russell Ltd was established in 1985 by John Claddy the MD, who is also a chemical engineer. John Claddy is considering retiring in five years time and his son Simon Claddy, the current factory manager, will take up the role of Managing Director. Simon has worked his way up from being a factory worker to his current position. He is therefore familiar with the factory processes, health and safety protocols and quality control processes. The production development manager is James Williams. He joined the company five years ago. James has a Master Degree in Chemistry engineering, and he also has extensive knowledge and experience in the industrial chemicals industry.

The industrial chemicals industry is vast and essential for the global economy. It produces essential raw materials for other manufacturer sectors, such as chemicals used in producing soaps and detergents; chemicals for paints, coating and surface treatment; and chemicals for plastic products, textiles and cosmetics etc. Russell Ltd specialises in producing industry chemicals used in manufacturing adhesives and sealants (Product Line A) and chemicals for manufacturing plastics (Product Line B). The company has patented the production process for Product Line A.

The booming building industry in some major cities in Australasia led John and Simon to consider expanding the business, by researching the feasibility of a new product line that produces chemicals used in paints, coating and surface treatment. James is currently leading a group of people in researching the production processes for the new production line. Sales manager Alice Wilson is conducting a market research for the new products. If the research results show that the new production line is feasible, the company will need additional finance from financial institutions at the end of the current financial year (ending 30 June 2016). Moreover, to keep Russell competitive within a market with increased awareness of environmental sustainability, the company continues to research and to refine its products and production processes to produce safer products and to minimise toxic waste.

The company's four senior management officers (the managing director, the sales manager, the product development manager and the factory manager) manage the company in a highly individualistic manner. All four officers sit on the Broad of Directors together with the Financial Controller Emma Glover and two independent directors, namely Matt Hamilton a professor in chemistry and Ashlyn Kim a lawyer. Emma Glover is Johns niece. The shareholding structure of the company is according to the table below.

Functions	Names	Shareholdings
Managing Director	John Claddy	20%
Factory Manager	Simon Claddy	20%
Production development	James Williams	15%
Sales manager	Alice Wilson	15%
Financial Controller	Emma Glover	10%
Long term serving employees		10%
External shareholders		10%

The company's accounting functions are concentrated at the factory. The sales branches and warehouses maintain only payroll, petty cash and inventory records, which are subject to review by the head office. Branch managers are responsible for reconciling inventory held at their branches and for signing off the monthly payroll cards. The company has relatively low turnover of staff because of the staff benefits offered to employees and the good leadership. The companys accounting system is a system which is separate from the production management system.

The company is closely held by the Johns family and until recently, there has not been any requirement for a financial audit. However, the company has an internal audit function, which mainly focused on auditing the processes of productions, safety, and waste disposals in order to fulfil industry regulations. As a result of company growth and Johns and Simons intention of having the company listed on the NZ Stock Exchange within a decade, a decision was made to have the companys financial statements audited. The company therefore approached you, an audit partner of Patterson & Partners to audit the company.

Patterson & Partners is a second-tier accounting firm in New Zealand. It offers assurance, advisory and tax services. There are 60 partners New Zealand wide. You have limited knowledge about the specialised chemical industry, however the senior manager of the firm, Wong Kang used to be a senior accountant in a specialised chemical manufacturer. Moreover, some of the partners of Patterson & Partners do have clients in the industry and the firm has resources about the industry and its trend. During your meeting with John and Simon, they also asked you to provide valuation services for their research & development expenditures. John and Simon are willing to give the auditors full access to their business information and any relevant personnel during the course of auditing. John and Simon also offered a bonus of $30,000 on top of the audit fees if an unqualified opinion is given. Financial information for the years ended 30 June 2016, 2015 and 2014 are given in the Excel Spreadsheet available on Blackboard.

QUESTION 1: NEW CLIENT ACCEPTANCE AND AUDIT PLANNING [45 Marks]

Evaluate whether you should accept Russell Ltd as your audit client. Present your answer in the given format below. [18 marks]

Factors for evaluating a new client	Explain why the factor needs to be considered	How does this factor impact on your client acceptance decision

Based on your analysis above, explain whether you would accept Russell Ltd as a client.