Ocean Manufacturing Case

Ocean Manufacturing, Inc. is a medium-sized manufacturer of small home appliances. In the past, the company mainly achieved sales through reliable and low priced products in small quantities. In recent years, they began to sell large quantities via three nation retail chains, which required more aggressive expansion on production capacity. The company plans to make an IPO to increase investment for the continuing expansion, and for that they decided to change auditor.

The first step of the job should be to determine independence. According to ET 101, if the auditor has greater than 10% of ownership over the clients, the independence is impaired. In case of Ocean, only one partner has about 0.5% of Ocean’s venture capital, which doesn’t present significant influence. So, Barnes and Fisher, LLP is independent from the client. The client also expects the auditor to provide IT services. ET 101 clearly states that designing, and initial training of the information system would not impair independence, but helping to operate the system or altering management decision on the system would impair independence.

The second step should be to evaluate the integrity of the management. The tone from the top usually determines the Internal Control of the overall company, and it’s an important part of audit planning to help determine the audit risk. When the management has high level of integrity, the auditor can assume lower risk of material misstatement, thus higher planning materiality. In this case, Ocean had high management turnover in 2011 due to “personal issues”; the former controller failed to manage the transition to the new accounting system; the vice-president of finance has conflict opinion with the predecessor; and the vice-president of finance five years ago had record of illegal gambling. All these information gives a big question mark to the integrity of Ocean’s management.

Then, the auditor should communicate with the predecessor