Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc. a manufacturer and distributor of automotive parts to the large auto-mobile manufacturers. Martin learned of this client opportunity through one of its staff accountants, who is a cousin of Phillip’s chief financial officer. In evaluating this opportunity, Martin first inquired with Phillip as to the reason for a change in auditors and was assured that the former auditors decided not to continue auditing Phillip Inc. because it no longer possessed the necessary expertise to audit clients in the automotive parts industry. A conversation with Phillip’s former auditors confirmed this explanation, so Martin is currently evaluating this opportunity.
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.

Identify issues related to the responsibilities principle that Martin should consider in its decision to submit a proposal to conduct the audit of Phillip.

  • CreatedOctober 27, 2014
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