Acceptance Decision on ProSalam Manufacturing Bhd

Acceptance Decision on ProSalam Manufacturing Bhd 1
ACCEPTANCE DECISION ON PROSALAM MANUFACTURING BHD
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Acceptance Decision on ProSalam Manufacturing Bhd 2
Acceptance Decision on ProSalam Manufacturing Bhd
ProSalam manufacturing Bhd is considering having a nationally competent audit firm to
review its annual reports in order to allow it to make an initial public offer. Khlif and Samaha
(2014) assert that a corporation should have competently audited statements in order to float its
shares. Since, the company wants to engage Siti & Co., the audit firm asks its assistant audit
manager to carry out preliminary investigations of the prospective client in order for the firm to
make a prudent acceptance or non-acceptance decision. Following the challenges in ProSalam
manufacturing Bhd, the assistant audit manager will carry out the analytical procedures and
compare with the industry’s ratios for 2016 audited statements. Furthermore, the manager will
perform the walkthrough and substantive tests to understand Prosalam’s business, hence, gather
enough evidence.
A company to be allowed to Task 1
1. Five Procedures an Auditor should Perform to Determine Whether to Accept a
Client. Which of the Five is Required by Auditing Standards?
An auditor should perform the following procedures to determine whether to accept a client
or not.
Request Information on the Characters of the Top Management, the Organization, and the
Influential Stockholders
The auditor should look for the information on the characters of the top management, the
organization, and the influential stockholders. According to Furnham and Gunter (2015), the
auditor should consider in a prudent way any issue, which might damage the integrity of the
administrators. The auditor should confirm such information from the bankers and lawyers of the
prospective client, among other third parties.

Acceptance Decision on ProSalam Manufacturing Bhd 3
Understand the Business of the Client and how they Operate
An auditor should understand the business of the client and how they operate before
engaging them by looking at the client’s financial statements, which include the balance sheets,
income statements, and the tax returns (Knechel and Salterio 2016).
The Reaction to the Opinions for the Internal Controls’ Enhancements
The auditor should look at the reaction of the management to the opinions for the internal
controls’ enhancements that both the internal and the outgoing auditors made before (Mbewu
and Barac 2017).
Independence between the Audit Committee and Board Members
Samaha, Khlif, and Hussainey (2015) assert that the auditor should look at the structure,
and the independence that exists between the audit committee and board members, and also the
external directors’ number.
Communication with the Outgoing Auditor
Chen, Peng, Xue, Yang, and Ye (2016) assert that the auditor needs to communicate with
the outgoing auditor in order to know the management’s integrity as well as why the client wants
to change the auditing firm.
Of the five procedures above, the auditing standards require the auditor to communicate with the
outgoing auditor. According to Chen, Khalifa, Morgan, and Trotman (2018), the Statement on
Auditing Standards number 84 (AU315) requires the auditor to investigate the management’s
integrity and know why the client wants to change the auditing firm.

Acceptance Decision on ProSalam Manufacturing Bhd 4
2. Prosalam’s Preliminary Analytical Procedures. Major Differences with the
Industry’s Ratios
The financial statements presented in the question are for 2015, 2016, and 2017. Since, the
question requires the comparison and the major differences with the industry’s ratios, I will use
the firm’s 2016 figures to perform the analytical procedures and compare with the industry’s
ratios for 2016. The reason for choosing to use the firm’s 2016 figures is because they are the
latest audited results of the company.
Return on Equity (ROE)
ROE = (Net Earnings /Total Shareholders' Equity) X 100
= ($2,521,000/$35,469,000) x100 = 7.11%
The industry’s 2016 ROE = 28.50%.
Therefore, ProSalam manufacturing Bhd produces less income from every dollar of the
ordinary shareholders' equity than the industry. This performance shows that the firm needs to
work harder in order to match other companies in the sector. According to Raza and Farooq
(2017), the ROE measures the extent to which the organization is able to make profits from the
funds of the firm’s stockholders.
Return on Assets (ROA)
ROA = (Net Earnings / Total Assets) X 100
= ($2,521,000/$66,821,000) x100 = 3.77%
The industry’s 2016 ROA = 8.80%.
Therefore, ProSalam manufacturing Bhd produces less income from its total assets than
the industry. The performance means that the firm should work harder in order to match other
companies in the sector. According to Idawati and Wahyudi (2015), the ROA shows how better
an organization performance is through comparing the earnings that the firm makes to the total
assets value.