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Ocean Manufactoring

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Submitted By sidrocksice
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Ocean Manufacturing, Inc.

1. The auditor is to do the following: a. Communicate with the previous auditor to discuss the details of how the previous audits went and inquire about management integrity. b. Take any steps necessary to obtain an understanding of the client and its industry and determine if the auditor is capable of performing the audit properly. c. Ensure that the auditor is independent of the client. d. Evaluate the integrity of the client’s management. e. Obtain and analyze all of the client’s financial data by performing analytical procedures.
The aforementioned steps are all requirements by auditing standards. Standards used: AS 12 paragraph 5, AU 150 General standards, AU 311 Paragraphs 3 and 4.

2. Analyzing financial data: f. The ROE for Ocean is 8.9% whereas the industry average is 20.33%. This raises concern because it is well below even half the industry average. g. The profit margin for Ocean is 2.4% whereas the industry average is 10.58%. This raises concern because it is a fraction of the industry average. This is an issue because if cost of goods sold increases for any reason, it may make the margin too thin. h. The ROA for Ocean is 4.5% whereas the industry average is 6.62%. This raises concern because it is well below the industry average, showing that management isn’t very efficient in the use of its’ assets.

3. Non-financial data: i. Ocean has had a high turnover for auditors, (3 in the past 12 years). In my opinion, this is a major red flag because it shows that there is something inherently wrong somewhere in the chain. j. Frank Stevens, Ocean’s vice president was very hesitant to allow the current auditor to speak with the previous auditor and have a whole spiel as to how the previous auditor was not very knowledgeable in Ocean’s industry.

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