ABAIKAN PERTANYAAN YANG ADA DI FILE KASUS (HAL.

7)
(REQUIRED)
1. The client acceptance process can be quite complex. Identify five procedures an auditor
should perform in determining whether to accept a client. Which of these five are required
by auditing standards?
2. What nonfinancial matters should be considered before accepting Ocean as a client? How
important are these issues to the client acceptance decision? Why?
3. Using Oceans financial information, perform the following analytical procedures in order
to gather valuable planning information. You can use spreadsheet, and be sure to turn in a
printout of your work:
(a) Change Analysis. Calculate the dollar and percentage increase or decrease in the various
balance sheet and income statement account balances between the fiscal years ended
2007 and 2008. Use the following column headings:
Per
Audit
12-31-07

Per
Books
12-31-08

Dollar
Change

Percent
Change

Index your working paper PL-1.

(b) Common Size Financial Statements. From the figures found on the income statement
working trial balance, calculate sales returns and expense accounts as a percentage of
gross sales for the years 2007 and 2008. Use the following four column headings:
Per
Audit
2007

2007
Percent of
Gross Sales

Per
Books
2008

2008
Percent of
Gross Sales

Index your spreadsheet working paper PL-2.

(c) Financial Ratios. Calculate Oceans financial ratios to reveal any problem areas and be
in a position to assess the financial condition of the company. Compare Oceans ratios
to the industry ratios provided. Identify any major differences.
Index your spreadsheet working paper PL-3.
(d) Analytical Procedures Memorandum. Having carried out these analytical procedures,
prepare a memorandum to assess the implications for your upcoming audit of Ocean
Manufacturing, Inc. Use word processing software. Include the following in your
memorandum:
(1) An Analysis of Audit Risks. Relying on the results of the change analysis obtained in
Requirements (a) and (b) above, list the accounts that appear to require attention
because of significant changes. Establish and state your decision threshold for
selecting accounts to be flagged for further examination. For example, you may
decide to seek explanations for changes exceeding 20% or $5,000. For each such

account that you identify, provide two plausible reasons for the fluctuation in the
account: (1) first, a logical and reasonable business (operational) reason; (2) second,
a possible client error (or irregularity) that may have caused the account to be
misstated. For example, if the balance of accounts receivable is significantly higher
in the current year than in the previous year, an obvious business reason is that sales
have increased. A possible client error is inclusion of January sales in December. In
this situation, the auditors concern is that sales were not recorded in the correct
time period. The possible effect of this error is overstatement of Sales Revenue on
the income statement and Accounts Receivable on the balance sheet. (Hint: refer to
on your audit text for the types of errors that may affect the various accounts.)
(2) Analysis of Questionable Accounts. Discuss other accounts that may appear
questionable, for example accounts that do not change when a change is expected.
(3) Assessment of the Risk of Financial Failure. Audit clients that are experiencing
operational problems or are near bankruptcy can present significant audit problems.
If sales are declining or growth has slowed, management may be inclined to
manipulate the financial records. For such reasons, the auditor needs to assess the
clients financial status. Assess the financial condition of Ocean Manufacturing, Inc
and the consequent audit risk related to client financial failure. Rely on the
financial ratio analysis from Requirement (c), as well as any other information you
have at hand. Refer to your finance text and other resources to determine the
meaning of each of these ratios. Whenever possible, relate the ratio analysis to
the change analysis in Requirements (a) and (b). For example, if inventory
turnover has slowed, relate this fact to any change in inventory.
(4) Overall Appraisal of Audit Risk. Provide an overall assessment of the audit risk
associated with this engagement. Base this assessment on the analytical procedures
you have performed and the knowledge of the client you gleaned from the above
information. Assess whether Ocean Manufacturing, Inc is a low, moderate, or high
risk audit client. In making this determination, consider the likelihood of
bankruptcy, the integrity of management, the state of the clients internal controls,
the likelihood of audit failure, and the probability of litigation stemming from this
audit engagement. Explain your conclusions.
4. Discuss whether Barnes and Fischer should or should not accept Ocean Manufacturing, Inc.
as an audit client. Identify the five or six most important factors or risk areas that will likely
affect how the audit is conducted if the Ocean engagement is accepted. Be sure to indicate
specific ways in which the audit firm should tailor its approach based on the factors you
identify.
MATERIALITY AND AUDIT RISK
5. Assume that your accounting firm decided to accept Ocean Manufacturing, Inc as client.
Using Ocean Manufacturings background and financial information perform the following:
a. Determine overall materiality for the financial statements as a whole based on the
results of preliminary analytical procedures, the understanding of the entity and its
environment obtained and professional judgment, considering the entity's
circumstances. You may consider the following rule of thumb to make a preliminary
judgment of overall materiality. Document your rationale in deciding benchmark and
percentage.

Nature of business
Profit-oriented entity
Not-for-profit entity
Entity in the mutual fund
industry

Rule of thumb
up to five percent (5%) of profit-before-tax from continuing
operations, or up to one-half of one percent (0.5%) of total revenues
up to one percent (1%) of total expenses or total revenues
up to one-half of one percent (0.5%) of net asset value

b. Determine performance materiality/ tolerable misstatement for each class of

transactions, account balances or disclosures at amount less than overall materiality.
Document your rationale in deciding performance materiality for each account.

6. Answer each of the following questions:

a) Distinguish between the terms performance materiality and preliminary judgment
about materiality. How are they related each other?
b) Why are different materiality thresholds relevant for different audit engagements?
c) Why does the auditor not use the same tolerable misstatement amount or percentage of
account balance for all financial statement accounts?
7. Identify the inherent risks for the audit of Ocean Manufacturing. For each inherent risk,
identify the account or accounts and the relevant audit objectives that may be affected.
8. Please check another attached PDF file. Do exercise no 5-33.