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