The Accounts Payable Saga

McPherson limited is a privately held company and has been in operation since 1951. The company manufactures home appliances, primarily, televisions, stoves, and refrigerators, which are sold locally and internationally. The company has over 850 employees and generates revenues in excess of $300B dollars. The demand for the company's products has been growing exponentially over the last five years; however, the company facilities are not adequate to meet the increasing demand. The company has also been experiencing accounting issues over the last 18 months and there have been rumors of widespread fraud.

The CEO, Peter Wood, and CFO, Mark Fuller have known each other for over 20 years, they attended the same university and have been good friends since their college freshman year. The CFO is a very shrewd and charismatic individual who believes in cutting costs and maintaining a lean workforce, especially administrative support staff. The CEO, Peter Wood, shares the philosophy of the CFO, accordingly, despite the increase in sales over the last three years the size of the corporate staff (HR, Accounting, Legal, and Compliance) has remained the same.

The organization has an employee hotline, whereby, staff can anonymously report issues, thus, preventing retaliation from managers or coworkers. Recently, the hotline has been inundated with allegations of widespread fraud within the accounts payable and purchasing department. At least one of the allegations states that the Purchasing Manager, Debbie Washington, has defrauded the company in excess of $250,000, by misusing her authority and creating fictitious vendors. The CEO is concerned about the allegations as the company is currently in the process of an initial public offering (IPO). Hence, if all goes well with the IPO, McPherson limited would transition to a publicly-traded company. Accordingly, the CEO needs to ensure that the fraud allegations are properly resolved.

To address the allegation of widespread fraud the CFO hires Anderson LLC, a CPA firm to perform an audit of the company's financial statements for the year ended December 31, 2021. Since McPherson is a privately held company, there is no legal requirement for the organization to have a yearly financial stamen audit. Accordingly, no financial audit has been executed over the last 10 years.

REQUIREMENTS

You are an Audit Manager with Anderson LLC, a Public Accounting firm, assigned to execute the financial statement audit of McPherson Limited as of December 31, 2021.

PART A(20 points)

Provide a persuasive argument as to how you would utilize ratio analysis and analytical procedures to evaluate the audit risk associated with accepting McPherson limited as a new audit client along with the key criteria you would use to decide whether your firm should accept the engagement. Detail the major analytical procedures that you would perform along with the major types of ratio analysis that you would use to accomplish the goal. Define and explain the purpose or benefits associated with using each ratio and analytical procedure.