Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 6, Problem 34FF
MINISCRIBE
(LO 1, 2)
As reported in the Wall Street Journal (September 11, 1989), MiniScribe, nc., inflated its reported profits and inventory through a number of schemes designed to fool the auditors. At that time, MiniScribe was one of the major producers of disk drives for personal computers. The newspaper article reported that MiniScribe used the following techniques to meet its profit objectives:
• An extra shipment of $9 million of disks was sent to a customer near year-end and booked as a sale. The customer had not ordered the goods and ultimately returned them, but the sale was nor reversed in the year recorded.
• Shipments were made from a factory in Singapore, usually by air freight. Toward the end of the year, some of the goods were shipped by cargo ships. The purchase orders were changed to show that the customer took title when the goods were loaded on the ship. However, title did not pass to the customer until the goods were received in the U.S.
• Returned goods were recorded as usable inventory. Some were shipped without any repair work performed.
• MiniScribe developed a number of just—in—time warehouses and shipped goods to them from where they were delivered to customers. The shipments were billed as sales as soon as they reached the warehouse.
For each of the techniques described, identify the audit evidence that might have enabled the auditor to uncover the fraud.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
6-73. MiniScribe
FRAUD As reported in the Wall Street Journal (September 11, 1989), MiniScribe, Inc., inflated its reported profits and inventory through a number of schemes designed to fool the auditors. At that time, MiniScribe was one of the major producers of disk drives for personal computers. The newspaper article reported that MiniScribe used the following techniques to meet its profit objectives:
An extra shipment of $9 million of disks was sent to a customer near year-end and booked as a sale. The customer had not ordered the goods and ultimately returned them, but the sale was not reversed in the year recorded.
Shipments were made from a factory in Singapore, usually by air freight. Toward the end of the year, some of the goods were shipped by cargo ships. The purchase orders were changed to show that the customer took title when the goods were loaded on the ship. However, title did not pass to the customer until the goods were received in the U.S.
Returned goods were…
Horizon Corporation manufactures personal computers. The company began operations in 2012 and reported profits for the years 2012 through 2019. Due primarily to increased competition and price slashing in the industry, 2020’s income statement reported a loss of $20 million. Just before the end of the 2021 fiscal year, a memo from the company’s chief financial officer (CFO) to Jim Fielding, the company controller, included the following comments:If we don’t do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write-down. The resulting loss for 2021 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of our inventory to J.B. Sales, Inc., in Oklahoma City. I know the company’s president, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost our loss to a profit. Then J.B. Sales will simply…
A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony.a. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud?b. How could this type of fraud be stopped?
Chapter 6 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
Ch. 6 - Prob. 1CYBKCh. 6 - Prob. 2CYBKCh. 6 - Prob. 3CYBKCh. 6 - Which of the following statements is true...Ch. 6 - Prob. 5CYBKCh. 6 - Prob. 6CYBKCh. 6 - Prob. 7CYBKCh. 6 - Prob. 8CYBKCh. 6 - Prob. 9CYBKCh. 6 - Prob. 10CYBK
Ch. 6 - Prob. 11CYBKCh. 6 - Prob. 12CYBKCh. 6 - Prob. 13CYBKCh. 6 - Prob. 14CYBKCh. 6 - Prob. 15CYBKCh. 6 - Prob. 16CYBKCh. 6 - Prob. 17CYBKCh. 6 - Prob. 18CYBKCh. 6 - Prob. 19CYBKCh. 6 - Prob. 20CYBKCh. 6 - Prob. 1RQSCCh. 6 - Prob. 2RQSCCh. 6 - Prob. 3RQSCCh. 6 - Prob. 4RQSCCh. 6 - Refer to Exhibit 6.2 and describe the differences...Ch. 6 - Prob. 6RQSCCh. 6 - Prob. 7RQSCCh. 6 - Prob. 8RQSCCh. 6 - Prob. 10RQSCCh. 6 - Prob. 11RQSCCh. 6 - Prob. 12RQSCCh. 6 - Prob. 13RQSCCh. 6 - Prob. 14RQSCCh. 6 - Prob. 15RQSCCh. 6 - Indicate how the auditor could use substantive...Ch. 6 - Prob. 17RQSCCh. 6 - Prob. 18RQSCCh. 6 - Prob. 19RQSCCh. 6 - Prob. 20RQSCCh. 6 - Prob. 21RQSCCh. 6 - Prob. 22RQSCCh. 6 - Prob. 23RQSCCh. 6 - Prob. 24RQSCCh. 6 - Prob. 25RQSCCh. 6 - Prob. 26RQSCCh. 6 - Prob. 27RQSCCh. 6 - Prob. 28RQSCCh. 6 - Prob. 29FFCh. 6 - Prob. 30FFCh. 6 - Prob. 31FFCh. 6 - Prob. 32FFCh. 6 - Prob. 33FFCh. 6 - MINISCRIBE (LO 1, 2) As reported in the Wall...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud. These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved back to an earlier period. The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud? How could this type of fraud be stoppedarrow_forwardAccounting In a description of a fraud scheme at Sharefore Inc., an analyst writes: “The next quarter, analyst expectations are higher, but sales have not picked up. The firm provides additional incentives to its sales force, uses overtime to boost shipments but now has additional expenses to contend with (incentives and overtime), so it does not fully accrue all its consulting expenses. Third quarter rolls around and sales still haven't improved enough, but the analysts keep increasing targets. Because this time, operating tactics are not sufficient, management pressures the CFO to meet analyst forecast numbers. The CFO becomes aggressive in the interpretation of installment sales and expense accruals. As expectations keep rising, so does the firm's stock price.” What form or forms of financial statement fraud is this? Where would we expect to see the impact of this form of fraud in Sharefore Inc.’s financial statements?arrow_forwardIn May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, chargingthe group with financial reporting fraud that allegedly cost investors billions in losses. Sunbeam Corporationis a recognized designer, manufacturer, and marketer of household and leisure products, including Coleman,Eastpak, First Alert, Grillmaster, Mixmaster, Mr. Coffee, Oster, Powermate, and Campingaz. In the mid-1990s,Sunbeam needed help: its profits had declined by over 80% percent, and in 1996, its stock price was down over50% from its high. To the rescue: Albert Dunlap, also known as “Chainsaw Al” based on his reputation as aruthless executive known for his ability to restructure and turn around troubled companies, largely by eliminating jobs.The strategy appeared to work. In 1997, Sunbeam’s revenues had risen by 18 percent. However, in April 1998,the brokerage firm of Paine Webber downgraded Sunbeam’s stock recommendation. Why the downgrade? PaineWebber had noticed unusually…arrow_forward
- The following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. In the fourth quarter of FY 1999, Rite Aid prematurely recognized $17 million relating to a litigation settlement with a vendor. Rite Aid should not have recognized this sum in that period because the settlement offer was expressly contingent upon the execution of a formal settlement agreement which did not take place until May 20, 1999. Moreover, the litigation settlement was also contingent upon the execution of a purchasing agreement that was not finalized until May 18, 1999. Both of these contingencies were expressly stated in the February 26, 1999 letter of intent signed by Grass.arrow_forwardDavid H. Brooks, a university graduate with an accounting degree and the former CEO of DHBIndustries, Inc., was charged in October 2007 with accounting and securities fraud for failing toreport the company’s inventory at the lower of cost or market. From 2001 to 2005, DHB purchasedlarge quantities of a material called Zylon and used it in making bulletproof vests that were sold tothe U.S. military and local law enforcement agencies. During this same period, DHB learned thatZylon deteriorated rapidly when exposed to light, heat, and body perspiration. DHB knew that oneof its competitors, Second Chance Body Armor, had stopped using Zylon in its vests and, eventually, discontinued its business because customer demand for its Zylon-based vests had evaporated.DHB did not write down its own inventory of Zylon and Zylon-based vests because it had a largecontract to supply the U.S. military with bulletproof vests. In its financial statements for the yearended December 31, 2004, DHB reported…arrow_forwardHorizon Corporation manufactures personal computers. The company began operations in 2013 and reportedprofits for the years 2013 through 2016. Due primarily to increased competition and price slashing in the industry,2017’s income statement reported a loss of $20 million. Just before the end of the 2018 fiscal year, a memo fromthe company’s chief financial officer to Jim Fielding, the company controller, included the following comments:If we don’t do something about the large amount of unsold computers already manufactured, our auditors willrequire us to write them off. The resulting loss for 2018 will cause a violation of our debt covenants and forcethe company into bankruptcy. I suggest that you ship half of our inventory to J.B. Sales, Inc., in Oklahoma City. Iknow the company’s president and he will accept the merchandise and acknowledge the shipment as a purchase.We can record the sale in 2018 which will boost profits to an acceptable level. Then J.B. Sales will simply returnthe…arrow_forward
- Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?arrow_forwardAerotech Corp is a multinational company that offers various products to its customers. The company provides discounts to its clients as part of its sales strategy. However, accounting for these discounts can be complex due to different types of discounts and the timing of recognition. Aerotech Corp recently offered a volume-based discount to one of its major customers, which resulted in a significant reduction in revenue for the current financial year. The finance team is struggling to account for this discount correctly. Can you provide a comprehensive step-by-step explanation of how Aerotech Corp should account for this volume-based discount in its financial statements in accordance with the Generally Accepted Accounting Principles (GAAP)?arrow_forwardThe CFO of PKD Corporation is very uncomfortable with its current risk exposure related to the possibility of business disruptions. Specifically, PKD is heavily involved in E-business, and its internal information systems are tightly interlinked with its key customers’ systems. The CFO has estimated that every hour of system downtime will cost the company about $10,000 in sales. The CFO and CIO have further estimated that if the system were to fail, the average downtime would be one hour per incident. They have anticipated that PKD will likely experience 50 downtime incidents in a given year due to internal computer system problems and another 50 incidents per year due to external problems—specifically, system failures with the Internet service provider (ISP). Currently, PKD pays an annualized cost of $150,000 for redundant computer and communication systems, and $100,000 for ISP support just to keep the total expected number of incidents to 100 per year. Required: Given the…arrow_forward
- 18.During an audit of a retail company, Lily, newly hired internal auditor, found a scheme in which the warehouse manager and a purchasing staff diverted approximately Php2 million worth of goods to an outside warehouse, the sold the goods to third parties. The fraud was not found earlier by the internal audit team since the warehouse manager updated the perpetual inventory records and then forwarded receiving reports to the accounts payable department for processing. Which of the following procedures did Lily perform which would have most likely led to the discovery of the missing materials and the fraud? Group of answer choices Random sampling of receiving reports and tracing to the recording in the perpetual inventory records. Selecting a random sample of purchase orders and trace to receiving reports and to the records in the accounts payable department. Performance of physical inventory count, then reconciliation of the amounts with the perpetual inventory records. Random…arrow_forwardIf a tech industry company has their total stockholder's equity go up by $793,000 and their Software development costs and licenses(net of current portion) go up by $85,000 within 1 year and they have had a previous fraud in their company, what audit procedures should be performed?arrow_forwardHorizon Corporation manufactues personal computers. The company began operations in 2012 and reported profits for the years 2012 through 2019. Due primarily to increased competition and price slashing in the industry, 2020's income statement reported a loss of $20 million. Just before the end of 2021 fiscal year, a memo from the company's chief financial officer (CFO) to Jim Fielding, the company controller, included the following comments: "If we dont do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write-down. The resulting loss for 2021 will cause a violation of our debt convenants and force the company into bankruptcy. I suggest that you ship half of out inventory to J.B. Sales, Inc., in Oklahoma City. I know the company's presdient, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost our loss to a profit. Then J.B. Sales will simply return…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Auditing: A Risk Based-Approach (MindTap Course L...
Accounting
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...
Accounting
ISBN:9781305080577
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:South-Western College Pub
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Computer Fraud; Author: Mitch Wenger (Accounting Systems & Tech);https://www.youtube.com/watch?v=-s82SCuMaTI;License: Standard Youtube License