Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc. a manufacturer and
Question:
Phillip is a particularly attractive engagement for Martin because it would allow the firm to enter into the manufacturing market. Most of Martin’s clients are in the services industry and are much smaller than Phillip. Martin is concerned about the numerous locations of Phillip’s warehouses and the ability to conduct an appropriate observation of Phillip’s year- end inventory balances; however, Martin’s staff accountant noted that the firm could engage component auditors to assist with this aspect of the audit engagement. As a manufacturing entity, inventory (and the related cost of goods sold) is highly material to Phillip’s financial statements. Alternatively, Phillip indicated that its previous auditors would observe physical inventory at the different warehouses on different days, reducing the need for them to rely on the work of others. To ensure that inventory was not transferred from one location to another and “double counted,” the auditors obtained a written statement from Phillip indicating that no such transfers occurred.
After considering these factors, Martin has decided to submit a proposal for the audit of Phillip. If accepted, Martin will take appropriate actions to ensure that the appropriate firm personnel are independent in fact and in appearance with respect to Phillip.
Required:
Identify issues related to the responsibilities principle that Martin should consider in its decision to submit a proposal to conduct the audit of Phillip.
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Related Book For
Auditing and Assurance Services
ISBN: 978-0077862343
6th edition
Authors: Timothy Louwers, Robert Ramsay, David Sinason, Jerry Straws
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