Reference no: EM13523974

ABC Healthcare Equipment

You have recently been promoted to Audit Manager of DPU CPA & Co. and will be leading a team to perform the year end financial audit of ABC Healthcare Equipment Company. This is DPU's first year performing this audit as ABC has recently decided to terminate their previous auditors stating cost as the factor for the change. The Audit Partners decided this would be an excellent client and signed a three year contract. Discussion with the previous auditors indicated it was a challenging audit with many disagreements on accounting principles, revenue recognition and internal control. The previous auditors did not go into detail regarding the disagreements. The previous auditors did issue Unqualified Reports for the Financial Statements and Internal Control the previous two years - the only two years they performed the audit. The previous auditors would not confirm that price was the reason for their termination.

The Partners have requested you and your team perform an analysis of ABC prior to field work following the questions below and submit a formal written presentation on your analysis and opinions. The written presentation is due November 18th during class and is required to be handed in to Trendell.

ABC is a supplier of Magnetic Resonance Imaging (MRI) equipment to health care facilities. It has been difficult times as many of their largest buyers have cancelled their contracts with ABC. There are industry rumors that the Japanese are preparing to release new technology in the MRI industry that will revolutionize the speed and clarity of the MRI equipment. This is not good news to the domestic MRI industry, which has been in a slump for the last four years.

To cope with some of the difficulties, ABC - three years ago - brought in a new CEO, Joe Harris. He has a reputation as a "turnaround" specialist in the MRI industry. He boosted sales at two other companies before being lured away by ABC's Board of Directors.

Harris had considerable expertise in raising capital. He was able to personally persuade investors to infuse an extra $20 million in cash shortly after he took over ABC. He slashed the workforce considerably, increased sales dramatically and had record earnings for the thirteenth consecutive quarter. ABC suffers from the normal effects of workforce downsizing coupled with exponential sales growth. Worldwide, ABC has 2,200 employees. Stock prices on ABC, traded over the New Your Stock Exchange, more than doubled within the last two years - the only MRI supplier to do so.

Harris, an autocrat, listens to no one. He projects aggressive forecasts, and then forces his managers to meet them. As a general rule, his subordinates are frightened of him.

ABC's most recent unaudited Income Statement and Balance Sheet are provided.

REQUIRED:

1. As the external audit manager, what issues, if any would concern you about ABC HealthCare Equipment Company?

2. What possible "red flags" of fraud exist? (if any)

3. Prepare a vertical and horizontal analysis on the income statement for ABC Healthcare. (See book page 151-152)

4. Based on these analysis prepared in #3, what might require further investigation?
a. Why?
b. What further steps might you employ to determine if the relationships identified above are a result of fraud?

5. Prepare a vertical and horizontal analysis on the balance sheet for ABC Healthcare.

6. Based on these analysis prepared in #5, what might require further investigation?
a. Why?
b. What further steps might you employ to determine if the relationships identified above are a result of fraud?

7. What ratios might be of some assistance in determining if there are any anomalies in cash and cash related accounts?

a. Prepare a ratio analysis to support your answer above.

8. What additional audit steps should you perform based on your answers to questions 1 - 7 above?