Client Acceptance. Newburg Company Is in an Industry in the Early Development

question 44

Essay

Client Acceptance.
Newburg Company is in an industry in the early development stage, where there are minimal barriers to entry to the client's business model. Newburg Company's audit committee decided to put their 2014 audit out for bids. One of the Big Four CPA firms had performed their audits from 2011-2013, and although happy with the previous auditor, the audit committee believed they should rotate to another firm. On the last audit, the Big Four's audit fees were $500,000. Barnaby, CPAs, came in as the low bidder, making a proposal to Newburg Company regarding audit fees for 2014. Their proposed audit fee was $250,000.
Required:
(1) Based on this scenario, describe the ethical decisions that an auditor must make during portfolio management decisions such as the client acceptance and client continuance decision. What is the relationship between ethics and high audit quality.
(2) What issues should the client's audit committee consider before going with the lowest bid?

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Definitions:

Activity-Based Costing

A costing method that assigns costs to products or services based on the activities and resources required to produce them, aiming for more accurate cost allocation.

Direct Labor-Hours

The total hours of labor directly involved in manufacturing a product, which are often used to allocate manufacturing overhead costs to products.

Direct Materials Cost

The cost of raw materials and components that are directly used in the production of a product.

Activity-Based Costing

A method of accounting in which costs are assigned to products or services based on the resources they consume.