As focusing on each of the five management assertions for the inventory account, we discovered that there are some risky areas that indicate the need for further attention during the audit. First of all, for existence or occurrence, all items in the inventory account must physically exist and be available for sale. Thus, the auditors should physically count finished goods, copper rod, and plastic inventories, and determine actual increase of inventories at year end. Also, they should select items from the inventory ledger and locate them and reconcile the quantity. Second, for completeness, the auditors should make sure that all existing inventories have been recorded completely , go around the warehouse and ensure all the inventories are recorded in the inventory ledger. Third, for valuation or allocation, the auditors should make sure that Laramie Wire manufacturing sticks with one valuation method(For inventory items, valuation is based on the lower of cost or market value, with several alternative methods for calculating cost), find out if there is any scrap inventory that needs to be recorded and written off ,and ask about obsolescence items. Fourth, for rights and obligations, the auditor should ask them if there is any consigned inventory at their warehouse. If there is, those inventories should not be recorded in the company's inventory ledger. Finally, for presentation and disclosure, the auditors should review the company's financial
Most of the criticism directed at Crazy Eddie's auditors stemmed from their failure to uncover the huge overstatement of the company's inventory and the related understatement of accounts payable. Third parties who failing to thoroughly investigate numerous suspicious circumstances they discovered. If I was a member of the Crazy Eddie audit team in 1986 and assigned to test the client's year-end inventory cutoff procedures. I selected 30 invoices entered in the accounting records near year-end; 15 in the few days prior to the client's fiscal year-end and 15 in the first few days of the new year. Assume that Client personnel were unable to locate 10 of these invoices. Since not having 10 invoices out of 30 requested in the end and beginning of the fiscal year should be pretty suspicious and should surely be noted in the final audit report. However to proceed with the audit I
Analyze the audit opinion formulation process and suggest at least one (1) improvement to the process to strengthen audit opinions. Provide a rationale to support your suggestion.
The audit procedures that an auditor is supposed to perform are there to help protect from fraud that may occur. The falsification of inventory count sheets could have been prevented if the auditor would have verified the information that was on the sheets. Crazy Eddie executives were excellent at staying one step ahead of the auditor because they knew in advance which stores the auditors would visit, then they would ship merchandise to those specific stores.
Sloan and Spencer Auditing Firm during phase III of Apollo Shoes audit plan, we will focus in two key cycles, which are the following: inventory and warehouse cycle and cash cycle. It is important to understand that are six types of transactions in the inventory and warehouse cycles which are: receive raw materials, store raw materials, process purchase order, and process of goods, store completed goods, and ship completed goods. In addition, it is important understand that cash is chiefly important and exceedingly vulnerable to fraudulent activity this is why an
On top of all that, Cardozo and Co, Inc.’s new CEO has requested for the accountant to not comply with summons or subpoenas of information related to the company. To analyze what the small accounting firm can be charged with or sued for, there are a few facts that need to be taken into consideration. While preparing the registration statement, the accountant discovered irregular entries he believed to be bribes that he ignored. There was also errors he did not discover, such as the overstatement of net sales and net profits. First, I will cover the common law liabilities, followed by the statutory liabilities, then explain the accountant-client
The inherent risks in an extremely competitive industry or sub-industry may include inappropriate revenue and expenses recognition, aggressive competing strategies, and unethical management in order to manipulate the financial situation and statements of the company. For example, management may try to improperly increase sale/revenue numbers by pushing merchandises to customers before year-end cut off or management may refuse to write off large obsolete inventory accounts which have decrease in value which in turn falsely exaggerates asset accounts. These risks may greatly affect the audit planning process. Auditors should pay more attention to audit procedure in testing cut off sale and expenses. Furthermore, auditors should determine the audit procedures to spend more time and resources to examine the client’s inventory accounts and the fair value of
2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities perpetrated by Crazy Eddie personnel: (a) the falsification of inventory count sheets,
This difference is also tied to the movement of globalization by way of the internal customs from around the world. Based on these practices the account standards around the world are created from a different basis. In the U.S, accounting standards are based on “bright lined rules.” Whereas, in most of the world accounting standards are based off of principles, with the emphasis on principles the international rules focus on the heart of the law. Rather than in the U.S these “bright lined rules” have been created as a result of the multitude of industries located here. The rules however, do not reflect the heart of the law; rather they create a line to be maintained.
Various ways are used to proactively search for inventory frauds. However, there should be specifically verification on the inventory balances in the financial statements by searching abnormal changes in the inventory and cost of goods sold account balances, looking for abnormal changes in inventory and cost of goods sold relationships. In other words, comparing financial performances and tendencies of the organization with those of competitors in the same sector, and analyze recorded amounts in the financial statements and nonfinancial statement
What happened: Millions of dollars in losses were split among the 129 stores and put as an expense on each stores balance sheet ->. In order to balance the expenses, management had to boost its assets by inflating inventory -> The auditor Coopers&Lybrant checked only 4 stores out of 129 in order to safe their money. In addition, they told senior management which stores they will check -> Phar-Mor prepared the inventory in accordance with its balance sheet -> The auditing firm was unable to uncover the fraud.
The retail consumer electronics industry was undergoing rapid and dramatic changes during the 1980’s, so did Crazy Eddie’s business. A factor in the Crazy Eddie case had to do with the inventory being overvalued. A small reason for why the inventory was overvalued is due to the rapidly decreasing prices in electronics due to constant improvements in technology. Electronics are out dated very fast if not sold upon arrival, they are always being improved on, and therefore electronic stores need to have a high inventory turnover. If not, then there is a chance that the inventory can become overvalued if the auditor does not stay up on the latest in electronics. Another change was with how Crazy Eddie was able to buy in such large amounts that he was able to sell via drop-shipments, this is something that the auditors are not used to because it is not a common occurrence. The drop-shipments would affect sales, but it should not affect inventory. As seen in this case, it required special attention because same store sales were increased by the way drop-shipments were recorded as revenue.
The Institute of Charted Accountants of England and Wales (ICAEW) issued a technical bulletin Audit 01/03 recommending that audit reports now should have disclosure limiting liability (The Institute of Chartered Accounants In England and Wales, 2003). On the opposite side of the argument the question was raised as to whether the added disclaimers undermine the accounting profession and raise more unanswered question than they leave answered. The Association of Chartered Certified Accountants (ACCA) issued a technical factsheet regarding this disclosure stating the “their incorporation as a standard feature of the audit report could have the effect of devaluing that report” (Technical Factsheet 84 - The Use of Disclaimers in Audit Reports, 2004). Meanwhile, academic circles seemed to follow the factsheet from ACCA, Dr Hooper agued that the “disclaimers undermine the concept of public interest and are more like a screen to legitimate the profession (Hooper & Xu,
4. Identify and briefly explain each of the principal objectives that auditors have to accomplish by preparing audit workpapers. How were these objectives undermined by Deloitte’s decision to alter North Face’s 1997 workpapers?