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Please see the attachment.
a. Identify the professional guidance that would assist Reddy & Abel in making a decision about client acceptance. Outline the key issues that you believe should be addressed when making a decision about client acceptance. Prepare a working paper for the file using the following format.
Professional guidance that would assist Reddy & Abel in making a decision about client acceptance:
The key issues that need to be addressed:
To reduce the likelihood of Reddy & Abel associating with a client whose management was not honest.
To avoid taking up assignments that it can reasonably expect to complete with professional competence.
To thoroughly consider the risk of taking up the Hood Furniture assignment in particular circumstances.
Particular issues related to Hood Furniture:
1. Mr. Conrad is aggressive about growth.
2. Revenue recognition with regards to 'bill and hold" sales;
3. The expected change in the accounting system that was expected to be replaced on 20x4;
4. The cutoff problems that Hood Furniture has faced with regards to audit adjustment;
5. The problem of improving cash flow from operations and the problem of slow operating cycles;
6. Mr. Hood's insistence on sufficient inventory maintenance;
7. The effect of debt-maturities on cash flows;
List Important Issues Regarding Client Acceptance. Explain Positive Indicators Describe Potential Issues Of Concern Solutions Or Possible Resolution For Issues Of Concern.
1. Mr. Conrad is aggressive about growth. It is possible that Hood Furniture may use illegitimate accounting methods to show a growth in sales and profits. .
2. Revenue recognition with regards to 'bill and hold" sales; The matter has been resolved in the past and should not come up again. In case the customer is billed and the goods are segregated from Hood's inventory, the company can recognize the revenue. .
3. The expected change in the accounting system that was expected to be replaced on 20x4; The expected change may be more suitable for the new expanded business of Hood Furniture. Reddy & Abel should examine is there is a change in the reporting entity. If that is the case then the changes should be applied ot all prior period. If there is a change in the accounting estimate, the change will be applied to the period of change and future periods. If there is a change in accounting principles, Reddy & Abel should check if these are required by the new GAAP or if these changes are justified properly. If there are any aberrations these should be clarified.
4. The cutoff problems that Hood Furniture has faced with regards to audit adjustment; This matter has been identified and the cutoff date and procedure should be examined by ...
This solution identifies the professional guidance that would assist Reddy & Abel to make decisions about client acceptance.. Then it gives you an audit engagement letter that Reddy & Abel gives to its client.