Question

1. Read the Janes' Electronics, Inc. case at the end of the exam and answer the following questions. Assume that you are preparing to bid on the audit and are working on your client acceptance issues. Develop a checklist of five areas or issues that you would want to research before you accepted this firm as an audit client. For each area or issue, explain why you would want to research it and give an example of where you might go to get some information about each issue. Your answer should demonstrate a sensitivity to the specific case where appropriate.
   1. (7 Points) Issue 1 -

1. 2. 7 Points) Issue 2 -
   3. (7 Points) Issue 3 -
2. 4. (7 Points) Issue 4 -
   5. 7 Points) Issue 5 --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Janes' Electronics, Inc. designs and markets high quality components for computers and other electronic devices using the cutting edge of technology. The firm supplies various types of data storage devices that can store more data than their competitors and allow for stronger data encryption. The company is relatively small compared to their competitors. Jane's has chosen to use independent contractors to fabricate key components for its data storage. This approach enables the company to concentrate on product design and development where Jane's believes it has greater competitive advantages. Customers include companies in office equipment manufacturing, game system design, and computer and smart phone producers. Janes' Electronics has a sizable customer list, but their share of the data storage market is still small. Janes' marketing strategy positions its products as an enabling technology to achieve design success for both industry leaders and newcomers. The company has a direct sales force and networks extensively with independent sales representatives and distributors. The company employs a team of application engineers to help customers incorporate Janes' Electronics products into their systems. After a slow beginning, sales have increased as the market has embraced Janes' Electronics' innovative products. The market for data storage technology in individual user products is declining because of the rise in on-line streaming of content. This market change would have a huge impact on Janes' business. However, Janes' research and development engineers believe that their expertise in data storage technology can be applied to cloud servers as well as to individual user devices. They recently hired a software engineer away from Amazon.com to work on data storage technology for cloud servers. Janes' facilities are in a single office building in a high-tech industrial park. Janes' is incorporated in the state where its business is located. Although company stock is held by almost 300 individuals and businesses, it is not traded interstate or through the mail and, consequently, they don't have to register with the SEC. Janes' supplies its bank with annual audited financial statements under the terms of its credit agreement. In addition, it provides these statements to its suppliers and has agreed to utilize audited data in a recently adopted profit-sharing bonus agreement. This plan is designed to build employee loyalty by creating performance and retention incentives. Janes' wants to retain the employees that been invaluable to the firm's development and who have made them such strong competitors in their market niche as well as attract a few new software engineers to help it develop data compression technology for on-line data transmission. The bonus agreement specifies that yearly bonuses will be based on audited net income. Since the audit has not been completed, the firm has made a preliminary accrual for the current year but will adjust the amount once this year's audit is complete. Janes' uses a balanced score card approach to determine each employees bonus. That is, each employee's bonus is based on a variety of financial and non-financial measures tailored to their job responsibilities that are designed to provide balanced incentives for them to improve performance and are not just tied to a few financial measures. Thus, individual bonuses will vary in amount, but the bonus total will average about 15 percent of the base net income. Janes' major shareholder and CEO, Jane Smith, holds 10 percent of the stock. Ms. Smith is the founder of Janes' Electronics and Chairman of the Board of Directors. Also included on the board are the two other corporate officers (secretary/treasurer and controller), three shareholders who each hold a five percent interest and five community leaders, one of whom, Sam Spade, is an active CPA. Sam chairs the Audit Committee that consists of Sam and two other outside directors. Janes' has a small internal audit department with only two employees. It relies on their external auditor to do thorough review of internal controls that goes beyond auditing standards requirements for a small, non-public firm to provide backup expertise for their internal audit department. Ms. Smith is lobbying the Board of Directors to approach private equity firms to raise additional capital for expansion. She feels that the firm needs to raise enough capital for essential increases in research and development needed to compete in the cloud server data storage market. However, she does not want to incur the substantial costs of a public stock offering and so wants to focus on private equity investors. She has emphasized to the officers and key employees that Janes' must show a record of strong and growing sales and profits to make a good showing for the private equity firms. Janes' Electronics has employed a small, regional CPA firm as their auditor since they started providing banks with audit financial statements 10 year. However, it has approached your firm, which is larger, to take over the audit because of their anticipated efforts to raise private equity capital.

Answer 1

The following are the procedures performed before accepting Jane electronics audit

1. Management integrity of Jane electronics ?

We should perform a search about client and its directors in news to idnetify any negative publicity against the company.

We should obtain KYC documents from the company and its director

2. Are we independent

We should check if any partner in the firm / firm has a business/ financial relationship with the entity if yes whether appropriate independence checks are in place

We should check the share holding pattern if any of the employees / partners in the firm hold shares beyond the threshold prescribed

We should also identify if any previous partner/ current partner has employement relationship with the client

3.Any identified legal case against the company?

We should go through the companies financials to check if there are any legal cases and what will be the impact of the same on the company

We should also understand if we being associated with the client will lead to negative publicity against the firm

4.Do we have requisite expertise to handle the client?

We should go through the list of regulations applicable to the client and to understand whether we have expertise in the regulations applicable to the client

5. Managements commitment to compliance with GAAP , internal controls

We should go through the financial statements and auditors report to identify if the company is compliant with the local GAAP requirements and any qualifications in the audit report.