Martin is considering submitting a proposal to conduct the audit
examination of Phillip Inc., a manufacturer and distributor of automotive parts to the large
automobile manufacturers. Martin learned of this client opportunity through one of its staff
accountants, who is a cousin of Phillip’s chief financial officer. In evaluating this opportunity,
Martin first inquired with Phillip as to the reason for a change in auditors and was
assured that the former auditors decided not to continue auditing Phillip Inc. because it no
longer possessed the necessary expertise to audit clients in the automotive parts industry.
A conversation with Phillip’s former auditors confirmed this explanation, so Martin is currently
evaluating this opportunity.
Phillip is a particularly attractive engagement for Martin because it would allow the firm
to enter into the manufacturing market. Most of Martin’s clients are in the services industry
and are much smaller than Phillip. Martin is concerned about the numerous locations of
Phillip’s warehouses and the ability to conduct an appropriate observation of Phillip’s yearend
inventory balances; however, Martin’s staff accountant noted that the firm could engage
component auditors to assist with this aspect of the audit engagement. As a manufacturing
entity, inventory (and the related cost of goods sold) is highly material to Phillip’s financial
statements. Alternatively, Phillip indicated that its previous auditors would observe physical inventory at the different warehouses on different days, reducing the need for them to rely on
the work of others. To ensure that inventory was not transferred from one location to another
and “double counted,” the auditors obtained a written statement from Phillip indicating that
no such transfers occurred.
After considering these factors, Martin has decided to submit a proposal for the audit of
Phillip. If accepted, Martin will take appropriate actions to ensure that the appropriate firm
personnel are independent in fact and in appearance with respect to Phillip.
Identify issues related to the responsibilities principle that Martin should consider in its
decision to submit a proposal to conduct the audit of Phillip.