Question

Custiss & Branch, CPAs, is considering whether to propose to perform the audit of BF Hemings Enterprises. The company is a large manufacturer of plumbing materials and hardware whose products are sold worldwide. Hemings is headquartered in the United States and all of its manufacturing and warehousing properties are located in the United States; yet, it has a considerable market share in Germany, Austria, and Switzerland. Recently, the company acquired an Austrian company that provides marketing and promotion services. Management of BF Hemings Enterprises claims that the acquisition will enable the company to handle its own global marketing and promotion activities, and will also help it establish a stronger European presence.
Kelsee McCloud is an in-charge auditor who has been assigned to conduct additional background investigation of Custiss & Branch. As a result of a media search and analytical procedures, Kelsee learned the following:
BF Hemings’ major supplier is a firm that is 50% owned by Brock Hemings, founder and majority shareholder of BF Hemings Enterprises.
The company’s profit margin exceeds the industry average despite declines in cash flows from operations and inventory turnover.
BF Hemmings stated that Custiss & Branch was being invited to propose on the engagement because of its experience at both performing integrated audits for publicly-traded businesses and assisting companies that issued IPOs. BF Hemings is anticipating an IPO within the coming year.

Required:
Based on this case scenario, list and explain significant risk factors that will affect the decision by Custiss & Branch regarding whether to propose on the engagement.



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  • CreatedJanuary 21, 2015
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