read the case and ans this qus
Q.1-What nonfinancial matters should be considered before accepting Green as a client? How important are
these issues to the client acceptance decision? Why?
Fircen Manufiecturingiltere Itatriductiun The New Client Accepance IJecision The partnerhip, formed in. 1954, now has over 6,000 protessionals on the payroll. The firm mainly prevides atadting and ax services, but it has recently fad success buiding the information ayatents consiting vide of the busines for non-audit clients and for aesit elients that are not poblicly traded. it is mid-January 2015, and you are a bewly promoted acdit manager in an office of Harnes and Fiselier, located in the Pacifie Northwest. You have been a senior auditor for the past three of your five years with Barnes and Focher. Your first assignment as madit manager is to assist an aud it partier on a client acceptance decision. The partner explains to yoa that the prospective elient, Gecen Manuficturing, is a medam-sized manu:acturer of small horme appilances. The purtier recently met the company's president at a local chamber of commeree meeting. The president indicated that/after some difficult negotiations, the company has decided to torminale its relationship with uscurrem audieo, The president explained that the main reason for the switch is to buidd a felationship witharinore 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 debe coveriants 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 psssed. time is af the essence for the company to contract with a new auditor to get the andit under way. The partner, Jane Hunter, is intrigued with the idea of having a client in the home applianoe industry, especially one with the favorable market position and growth potential of Green Manufaeturing Athough theire are several manufactarers of small home appliances in the area, your office his never bad a client in the indiustry. Most. of your office"s carrent audit elients are in the healcheare services industry. Thus, the partner feels the engagemem presents an excellent opportumity for Barmes and Fischer to eater a new market. On the other hand, knowing the risks involved, the partner wants to make sure the client acceptance decision ts carefully considered. Bakekground 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 cormmon 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. Yot 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 fim's advice and guidance on getting everything in order for the upcoming lPO. 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 refail 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. oninion felating to revemies and receivahles. Gieen has changed audito in the thene over-the paisf 72 years: Manayement In October 20 t , the company evpericneed wignificant manazement fursover when both the viceipresident of operations and the controller resigaed to take jobs in ofber citice. The teason for them leaving was disclosed by managenent as being related to "nersonal ismes," A new vice-prevident, Jessita Wood, was hired in Nonember, and the new controller joined early last month lessica is an MBA with almost 12 years of ceperience in ihe industry. Theodore Jones, the new controller, has little relevant experience and scents fruetased with the company" new if system. The eompany a presiden, Andrew Cale, has a BBA and, as the founder, has worked at all levels of the businese. Mr. Zachery, who is priacipally in charge of the company's procurement and masuracturing functions. meets weekly with Mr. Cole, as does Frank Stevens, who has served as vice president over finance foe the past eielt years. Accousting \& Control Systems The company switched 60 a new, integrated central accounting syitem in early 2014 . This new systemi maintains integrated inventory; accounts receivable, accosunts puysble, payroth, and general iedger software modules. The transition to the new systert 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 it to better meet coetpany needs, to retrain the accoanting staff, and to adapt the company's accounting controls fo better complement the system. Problems still exist in inventory tracking and cost accumulation, receivables billing and aging, payroll tus deductions, payables, and balance sheet accoant classifications. The company stopped parallel processing the old accounting system in April 2014. Daring several brief periods throughout 2014 , conventional audit trails were not kept intact due to system failures and errors made by untrained persoanel. The company's accounting staff and managemeat are both frustrated with the sifuation 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 system in place at Green. However, your focal 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 Iaventories The salesireceivables 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, wherens the remainder of the accoumts 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 somewruat less organized. The company uses a complicated hybrid form of process-costing to accumalate inventory costs and to account for interdepartmental in-process inventory transfers for its four majot product lines. Predecessor Auditor When you approached Frank Stevens, Green's vice-president of finance, to request permission to speal with the previous auditor, he seemed hesitant to discuss mach 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 comperent to help the company with its new IT system. He further indicated that the predecessor auditor and Grcen's management had disagreed on minor accounting issues during the prior year's audit. In Mr. Stevers' opiniton. the disagreement was primarily due to the auditor's lack of understanding of Green's business and indantry 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 has to record certain adjustments to revenues and receivables. Mr. Stevens believed the adjustments were uiniziesary beat 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 upeoming IPO, noting: that companies often switch to larger accounting firms with national reputations in preparation for going public. 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 aceruals 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 upeoming 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 Fiseher is required to flle 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
