Client Acceptance Analysis

Client Acceptance Analysis: 

 

In determining if we want to accept SDE, Inc. as a client we will look at many factors before making a decision. Under Quality Control Section 20: Acceptance and Continuance of Clients and Engagements we understand policies and procedures should be established for deciding whether to accept or decline a specific engagement for SDE. Such policies and procedures should provide us with reasonable assurance that the likelihood of association with SDE whose management lacks integrity is minimized. Establishing such policies and procedures does not imply that we vouch for the integrity or reliability of SDE, nor does it imply that we have a duty to any person or entity but ourselves with respect to the acceptance, rejection, or retention of SDE. However, it suggests that our firm be selective in determining our relationship to SDE and the professional services we will provide. Policies and procedures should provide reasonable assurance that our firm: undertakes only those engagements that we can reasonably expect to be completed with professional competence; and appropriately considers the risks associated with providing professional services in the particular circumstances. To minimize the risk of misunderstandings regarding the nature, scope, and limitations of the services to be performed, policies and procedures should provide for obtaining an understanding with SDE regarding those services.

Important Risks:  

•  Staffing is a risk that we need to consider when deciding to accept SDE as a client or not. The more esoteric and the more difficult the issues are, the more likely we are to send out robust, experienced staff even for field work that we might not otherwise do.  Or it might inform us that we need to obtain more industry specific expertise either within our firm or through some sort of joint venture arrangement.

• We will also consider SDE’s business risk, with the risk of SDE not being profitable and not continuing to survive. There could be going-concern issues, inflated profit goals, or operations in volatile industries that can impact an SDE's risk. In this case financial trends are the most important part of SDE's business risk. We cannot control the amount of SDE's business risk but we can assess it and decide whether or not to accept the risk.

• Audit risk is another factor. There are certain factors that will impact the level of audit risk. Some of those factors include high volume of significant year-end transactions, financial reports not prepared in a timely manner, and material weaknesses in internal controls.

• Another factor is the auditor’s business risk, which is our risk. We as auditors also face risk from our existence as a company. By providing services to clients, we are open to the risk of our business. During the acceptance of a future client, we can look for factors that may impact the risk of being associated with the SDE. Some of the high-risk factors include frequent changes in auditors, high number of lawsuits, and an initial public offering. We have the ability to control our business risk by carefully analyzing SDE.

Draft Engagement Letter:

Tomb Raiders Auditors

Certified Public Accountants

February 9, 2012

M. M. Moore

Chair of our Client Acceptance Review Committee 

900 University Ave.

Riverside, CA 92521

Dear Mr. Moore:

Our team, Tomb Raiders Auditors has evaluated Super Duper Electronics, Inc. Through our understanding of the company we noticed that there were a few things that caught our attention that would make SDE a going concern.

There were some red flags in the dramatic increase in accounts receivable and inventory. Some things that caught our attention as going concern include total liabilities with a large increase and a large increase in short term debt as well. There was also a negative cash flow which we believe can be a going concern problem as well. This negative cash flow is an indicator that SDE will have no cash to expand during the year.

Through analysis of the financial statements, we believe SDE to be a going concern. Although SDE’s industry environment is stable and has some indications for growth, SDE as a company itself has ever increasing negative cash flow, debt, and subpar operations performance. With careful analysis, we have decided that we will not be considering them as a future client for our firm.

Respectfully,

Tomb Raiders Auditors

Business Model

Business Model:

External Agents Economy                      Media                    Government                     Environment
Strategic Partners Doctor TJ
Resources and Suppliers ·         Suppliers: Sharp Samsung Sony ·         Shippers ·         Employees ·         Shareholders			Internal Processes							Markets, Customers, and Products ·         TV’s, cell phones, sound equipment ·         Home entertainment, Small businesses, Hope offices, Electronics users, Small retailers
				Strategic Management Consumer retailer and wholesaler (“trans-shipper”)
				Primary Processes Large scale advertising and discount policy
				Resources & Processes Accounting management Investor acquisition
Competitors Wal-mart                      Best Buy                 Circuit City

Business Model: Discussion

External Agents

There are several external agents that could have an impact of SDE Inc.  One agent is the economy.  Since the downturn of the economy, there has been a decrease in consumer spending.  This impacts the sales of SDE Inc., especially if consumers view their products as luxury items as opposed to everyday necessities.  Another external agent that has potential impacts on SDE Inc. is the media.  SDE Inc. uses a wide spanning media campaign advertising its low prices.  If media outlets and news outlets uncover controversial business practices two things could happen.  The first thing is that these practices will be publicized causing damage to SDE Inc.’s image.  The second thing that could happen is media outlets may refuse to continue business with SDE Inc., thus resulting in the loss of its major advertising method.  Also, the government acts as an internal agent through its regulation of the company in several ways (e.g. labor regulation).  Finally, the environment acts as an external agent.  Consumers would rather see a company that is environmentally conscious as opposed to not.

Strategic Partners

A strategic partner that SDE Inc. has formed a relationship with is radio personality Doctor TJ.  They work together in order to advance joint objectives.  SDE Inc. gains more publicity and Doctor TJ gets further funding for his show.

Resources and Suppliers

Serving as both a retailer and wholesaler, SDE Inc. depends on several suppliers as well as employees with different skill sets, technology, shippers, and shareholders.  Potential suppliers of SDE Inc. are technology producers who generate products SDE Inc. sells.  These can include but are not limited to TV manufactures such as Sony, Toshiba, Samsung, and Sharp.  They include cell phone providers such as Sprint, Samsung, and Motorola.  They rely on shipping companies to ship orders from to them from suppliers and from them to smaller retailers.  They rely on employees to understand their different product lines and make sales.  Finally, they rely on shareholders for capital.

Internal Processes

Strategic Management: one key strategic management approach the SDE Inc. has adopted is its operation as both a individual consumer retailer as well as a wholesaler to smaller retail outlets.  SDE Inc. has therefore also taken on the role of trans-shipper.

Primary Processes:  Primary processes are the activities that help create customer value, such as marketing and customer service.  One main activity that SDE Inc. has adopted is its barrage of media advertisements that encompass its main region (California).  Also, SDE Inc.’s marketing strategy of announcing their low prices and discount policy help create customers.

Support processes: Support processes are the activities that are not directly related to operations but help in the success of the company.  The main support processes that we were able to identify for SDE Inc. were its accounting management, in terms of bookkeeping and its investor acquisition, in terms of continued acquisition of stockholders.

Markets, Customers, and Products

SDE Inc. is an electronics retailer that caters to the everyday electronics needs of consumers.  It does not provide large systems for big offices or companies.  Its main product lines are televisions, cell phones, and sound equipment.  Its market focus is on home entertainment, small businesses, home offices, and the individual electronics users.  Their customer target base would be home shoppers, small business owners and middle class consumers, usually a somewhat tech savvy individuals.  However, since SDE Inc. has expanded into somewhat of a wholesaler itself, it has added small retailers to its customer base as well.

Competitors

The competition in the consumer electronics industry tends to be very strong.  Not only does the US consumer electronics industry include 27,000 stores, but it is highly concentrated as well in terms of the 50 largest retailers accounting for 80% of sales. (Hoovers)  When we look at competition for SDE Inc, we must specifically look for companies with similar target markets and customers as well as similar product lines. (Knechel)  Since SDE Inc biggest product lines involve home electronics their biggest competitors include Best Buy, Wal-Mart, and Circuit City.