Assignment

Risks of Potential New Audit Client

Background

Diane Miller, a new partner at a regional CPA firm, was recently appointed to the board of directors of a local civic organization. One of the directors is John Matthews, CEO of Alpha Plastics. John expressed interest in having Diane's firm submit a proposal for auditing his company. Alpha Plastics is a privately held company that develops a variety of chemical and plastic type materials used in commercial and personal applications. Many of the directors of Alpha Plastics are friends of the CEO and are senior executives in other large privately held and publicly held companies. The directors are very busy with their own companies and defer to decisions and recommendations of John regarding corporate activities at Alpha. Diane believes that if she can get the Alpha Plastics audit it can possibly lead to other business through the connections on Alpha's board of directors.

Alpha just moved to the area recently from another state, which is why they are searching for a new local auditor. Little is known about the previous auditor or history of the company at its previous location. After lengthy negotiations, the company received a $700,000 grant from state and local tax authorities to move their plant to its new location. The terms of the grant require Alpha to maintain certain employment levels over the next three years or the grants must be repaid. The production staff has been cut by over 20% over the past year but the CEO is confident that production will pick up again with the introduction of some new products for the automotive market.

With the recent downturn in the economy, Bravo Plastics, a major competitor, has been taking a larger share of the plastics business. Consequently, the CEO is pressuring supervisors to reduce new product development time from 24 months to 12 months. Because of the downturn in the economy, though, Alpha has not been able to make any new capital expenditures to support the intensified research and development efforts.

Alpha's new CFO joined Alpha after the move and has been with the company for only six months. He takes a hands-off approach and delegates many of his duties to the company's controller. The CFO is not familiar with the new computer system installed after the move, but the controller is very familiar with so the CFO defers to the controller to monitor financial reporting. Upon arriving at Alpha the CFO also realigned reporting responsibilities so the credit and collections department reports directly to the VP of Sales. Simultaneously, the VP of Sales was given additional authority in negotiating sales contracts and recognizing revenue.

The company has a $4.5 million bank loan secured by a floating charge over all corporate assets. The loan agreement requires Alpha to undergo an annual environmental assessment of its old and new facilities, and requires that the company maintain certain financial ratios. Because of the recent downturn in business, the CEO is unsure they will meet the financial ratio requirements but the CFO has assured him that the company will not have any problems with the loan.

Instructions

Diane has asked you to prepare a memorandum covering in detail the audit business risks you foresee arising from this potential new client.

Your paper should meet the following requirements:

• 4-5 pages in length
• Formatted according to CSU-Global Guide to Writing and APA Requirements
• Include at least 2-3 outside sources. The CSU-Global Library is a great place to start.