Chapter 02 Problem 57 LO 2-2 Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc., a manufacturer and distributor of automotive parts to large automobile manufacturers. Required: The following are some notes related to Martin's Initial consideration of this potential engagement identify the component of the responsibilities principle (competence and capabilities, ethical requirements, or professional skepticism and professional judgment most closely related to that factor Martin leamed of this client opportunity through one of its staff accountants, who is a cousin of Phillip's chief financial officer. Phillip is a particularly attractive engagement for Martin because it would allow the firm to enter into the b. manufacturing market (most of Martin's clients are in the services industry and are much smaller than a d. a. f. Phillip). Martin 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 they no longer possessed the necessary expertise to audit clients in the automotive parts industry (this explanation was confirmed by the former auditors). 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 When asked about inventory observation, Phillip indicated that its previous auditors observed physical inventory at different warehouses on different days and obtained a written statement from Philip that transfers between locations did not occur. If Martin obtains the engagement, it will take appropriate actions to ensure that firm personnel are independent in fact and in appearance with respect to Phillip