Case 1.1

[1] Five procedures an auditor can use in determining to accept a client are: • Evaluate the integrity of management • Identify special circumstances or unusual risks • Assess competency to perform the audit • Evaluate independence • Determine ability to use due care

Auditing standards require competency, independence and due care.

[2] The return on equity and assets along with the debt to equity ratio is lower than the industry. The profit margin is much greater than the industry average. These increased profits, if sustained, can keep the debt to equity ratio below average.

[3] Evaluating the integrity of management is vital. If management is dishonest the engagement should not be accepted. In this case, management was honest and disclosed the past auditor differences of opinion and allowed the audit firm to talk to the previous auditor. The special circumstance of the goal of an IPO is an important consideration. Given the lack of experience in this industry and the lofty goal of the company, the audit firms’ legal liability is increased. In a litigious society, we decline any clients that put our firm at great risk.

[4]
[a] Having the CPA firm help develop and improve the IT system is beneficial for the company as it provides one stop shopping. Often it is easier to work with someone who is vested in other areas of your business. On the other hand, this creates an issue that they would be developing that which they will audit. The Sarbanes Oxley Act Section 201 restricts non-audit services for issuers. In this case, technology services could be viewed as financial information services or expert services.
[b] Independence rule 101 states that a partner or employee may not hold more than 5% and the partners holdings are just over half of one percent. Therefore, this is not a violation of the AICPA code