Sun Element Enterprises (SEE) is a manufacturer and retailer of patio furniture and outdoor accessories that sells its products throughout the Atlanta metropolitan area. The company operates one manufacturing facility and four retail outlets. Management of SEE invited Cames & Littler, CPAs, to participate in the proposal process for the company’s financial statement audit for the year ended December 31, 2009.
John Hartigy, CPA, is an audit manager for Cames & Littler who performed the preliminary evaluation of SEE’s business. John gathered information during a visit to SEE’s company headquarters, where he took a tour of the manufacturing facilities and administrative offices, observed company personnel performing their duties, held discussions with client personnel, and reviewed certain accounting records and financial statements. Significant findings are as follows:
SEE’s sales revenues for the prior year were $3.7 million, and an increase of 8% is projected for the current year. Net assets are $15 million.
SEE recently acquired a nursery and landscaping business which services customers in its same geographic region.
Computer systems were outdated, but the company plans to implement a new, customized automated system.
Perpetual inventory records are not currently maintained due to limitations of the computer system.
Management indicates that there is no need for an audit committee or internal audit function due to the small size of the company. There are only two full-time employees in the accounting department.
Management indicates that the prior auditors, Elwey & Makk, LLP, were dismissed because the company was disappointed with their lack of expertise related to the selection and implementation of an automated accounting information system. Elwey & Makk were not yet available for consultation.
Management was not willing to divulge specific details pertaining to the company’s internal controls until its new auditors were named, but indicated that the systems were strong.
a. What initial considerations apply to an auditor’s decision regarding a new client proposal?
b. What is the significance of obtaining preliminary information prior to accepting a new audit engagement?
c. Consider each of John’s findings and determine how it will affect the audit engagement and whether it presents significant concerns that may affect the firm’s decision to accept this new audit client.