Ch2 Case study - Cloud 9 (textbook p.78-79) auditing

Sharon Gallagher, Josh Thomas and Jo Wadley are members of the audit firm W&S Partners. Sharon is

the audit manager and Josh is the audit senior assisting the partner, Jo Wadley, evaluate the decision

to accept the Cloud 9 Pty Ltd (Cloud 9) audit engagement for the year ended 31 December 2016.

Background information about the company is presented in the appendix to this text. In

addition, Josh has discovered the following facts and has requested your help to document and

assess the factors that affect the client acceptance decision.

The Finance Director of Cloud 9, David Collier, is married to a distant relation of PS Nethercott, a

partner in W&S Partners' consulting department.

The consulting department at W&S Partners has tendered for an IT installation project at Cloud 9.

The fees from this project, if the tender is successful, would be twice the size of the audit fee.

A survey of audit staff at W&S Partners has revealed that 30 per cent have purchased Cloud 9's

products (basketball shoes or workboots) in the past.

Four members of the IT department at W&S Partners have shares in retailers that sell Cloud 9's

products. In each case, the shareholdings were disclosed on the firm's financial interests register

and the size of the shareholding is deemed material under W&S Partners' ethical guidelines.

An article in a newspaper published in the United States has claimed that Cloud 9 Inc. (Cloud 9's

parent company) was secretly running 'third-world sweat shops'. The article alleged that shoes

made by other wholly owned subsidiaries of Cloud 9 Inc. in China and Brazil were using illegal

child labour in factories that did not meet local health and safety rules. Cloud 9 Inc. has vehemently

disputed the accuracy of the article, suggesting it was planted by a rival company. Cloud 9 Inc. has

invited international advocacy groups to visit its factories at any time.

Required

Answer the following questions based on the information presented in the appendix to this text and

that presented above and throughout chapters 1 and 2. Consider your answer to the case study

questions in chapter 1 where relevant.

(a) Prepare a document that explains the impact, if any, of each piece of relevant information on your

client acceptance decision for Cloud 9.

(b) List and explain any additional actions you would take before making your client acceptance

recommendation to the partner, Jo Wadley, in this case.

(c) Assume the decision is made to accept Cloud 9 as a client. Prepare the client engagement letter.