Your accounting firm is a medium-sized, national CPA firm with over 6,000 professionals. It is mid-January 2021, and you have been promoted to audit manager of the Pacific Northwest office.  Your first assignment is to help an audit partner with a client acceptance decision. 

The partner explains that the prospective client, Angeli Manufacturing, is a medium-sized manufacturer of small home appliances.  The company's president indicated that, after some complex negotiations, the company decided to terminate its relationship with its current auditor. The main reason for the switch was that they hoped to build a relationship with a more nationally established CPA firm.  The company has indicated that they plan to make an initial public offering of its common stock within the next few years.  Their annual financial statements have been audited for the past 12 years to comply with debt covenants.

The partner is intrigued by having a client in the home appliance industry.  There are several home appliance manufacturers in the area, but your office has never had a client in the industry.  Most of your firm's audit clients are in the healthcare services industry.  The partner feels this is an excellent opportunity for the firm to enter a new market. On the other hand, knowing the risks involved, the partner wants to ensure that the client's acceptance decision is carefully considered.

 

BACKGROUND OF ANGELI MANUFACTURING

Angeli Manufacturing manufactures small- to medium-sized home appliances.  Although their common stock is not publicly traded, they are planning an IPO in the next few years in hopes that they will be able to trade Angeli's common stock on the NASDAQ.  You have been assigned to gather information to make a recommendation on whether your firm should accept Angeli as a client.

Angeli wants to hire your firm to issue an opinion on its December 31, 2020, financial statements.  Angeli's unaudited December 31, 2020, financial statements report total assets of $76 million, sales revenue of $145 million, and net profit of $3.4 million. In the past, the company has not attempted to expand aggressively or develop new product lines. Instead, it has concentrated on maintaining steady growth by providing reliable products within a moderate to low price range.  However, Angeli hopes to use the capital from the upcoming IPO to aggressively expand from a regional to a national market.

Though shaken by recent management turnover and ongoing difficulties with the company's new accounting system, management feels that Angeli is in a position to grow considerably. Management notes that earnings have increased substantially each year over the past three years and that Angeli's products have received growing acceptance in the small appliance marketplace.  The company received a qualified opinion about revenues and receivables three years ago.  Angeli has changed auditors three times over the past 12 years.

 

Management

In October 2020, the company experienced significant management turnover when both the vice president of operations and the controller resigned to take jobs in other cities.  The reason for their leaving was disclosed by management as being related to "personal issues."  A new vice president of operations was hired in November.  She has an MBA and almost 12 years of experience in the industry. The new controller joined early last month.  He has little relevant experience and seems frustrated with the company's new IT system.  The company's president has a BBA and has worked at all levels of the business. The vice president of finance has been in that position for the past eight years.  The president, vice president of finance, and the manager in charge of procurement and manufacturing functions meet together each week.

 

Predecessor Auditor

When you approached the company's vice president of finance to request permission to speak with the previous auditor, he seemed hesitant to discuss much of the prior audit firm.  He explained that, in his opinion, the previous auditor did not understand Angeli's business environment very well and was not technically competent to help the company with its new IT system.  He further indicated that the predecessor auditor and Angeli's management had disagreed on minor accounting issues during the prior year's audit.  In his opinion, the disagreement was primarily due to the auditor's lack of understanding of Angeli's business and industry environment. According to the vice-president of
Finance, the previous auditor, felt that because of the accounting issues, he would be unable to issue a clean opinion on the financial statements.  Angeli had to record certain adjustments to revenues and receivables to receive an unqualified opinion.  After some discussion between the vice president over finance and Angeli's president, you are granted permission to contact the previous auditor.

During your visit with the previous auditor, he indicated that his firm's problems with Angeli primarily related to the complexities and issues with Angeli's new IT system and management's tendency to aggressively reflect year-end accruals and revenue to meet creditors' requirements.  The auditor disclosed that the dissolution of the relationship with Angeli was a mutual agreement and that his firm's relationship with management had been somewhat complex almost from the beginning.  The final straw that broke the relationship involved a disagreement over the fee for the upcoming audit.

 

Client Background Check

A check on the background of Angeli's management revealed that five years ago, Angeli's vice-president of Finance was charged with a misdemeanor involving illegal gambling on local college football games.  The background check revealed no legal or ethical problems with other Angeli executives.

 

Independence Review

There appears to be no stock ownership issue except that a partner in your firm's Utah office owns shares in a venture capital fund which in turn owns a private investment in Angeli common stock.  The venture capital fund holds 50,000 shares of Angeli stock, currently valued at approximately $18 per share.  The stock is not publicly traded, so this value is estimated.  This investment represents just over half of one percent of the fund's total holdings value. The firm's partner's total investment in the mutual fund is currently valued at about $56,000.

 

Required:
Type a memo (of any format and length—there is no minimum or maximum number of words) to the partner, making a recommendation as to whether your firm should or should not accept Angeli Manufacturing as an audit client. Assume some of the other partners could read this and would be seeing all information regarding this client for the first time, so we want this memo to address all relevant information as if it is new information to the partner reading the memo (In other words, be complete—make it to where it will not be necessary for any of the partners to need to go beyond this document for background or clarification. Make it a one-stop shop.).  As you are drafting the memo, be sure to consider (i.e., You will lose points for failing to do) the following:

• identify and concisely describe any potential opportunities and problem
• use and cite relevant standards when necessary (for example: for the potential independence issue)
• use unambiguous language
• present information completely but concisely
• make sure your communication has a logical flow
• consider reasons both for and against acceptance (this is a communication assignment; there is no right or wrong answer—in the real world, some would accept and some would not)

Answer rating: 100% (QA)

Your Name Audit Manager Pacific Northwest Office Date Current Date Subject Recommendation on Client Acceptance Angeli Manufacturing Dear Partners Name I have thoroughly reviewed the information regard... View the full answer