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Financial Audit AOL 2

The document discusses potential fraud schemes at Eddie Company involving inflating inventory values and recognizing inter-store deliveries as sales. It recommends audit procedures to detect misstatements or fraud, such as analyzing accounts payable and inventory turnover ratios, testing controls and details, and evaluating unexpected relationships in revenue accounts. Calculations of days sales in inventory and accounts payable ratios show unfavorable trends over 5 years at Eddie Company that warrant further investigation. Additional audit evidence could include physical examination of fixed assets and supplies to verify their actual existence and condition.

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Natasha Herliana
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46 views4 pages

Financial Audit AOL 2

The document discusses potential fraud schemes at Eddie Company involving inflating inventory values and recognizing inter-store deliveries as sales. It recommends audit procedures to detect misstatements or fraud, such as analyzing accounts payable and inventory turnover ratios, testing controls and details, and evaluating unexpected relationships in revenue accounts. Calculations of days sales in inventory and accounts payable ratios show unfavorable trends over 5 years at Eddie Company that warrant further investigation. Additional audit evidence could include physical examination of fixed assets and supplies to verify their actual existence and condition.

Uploaded by

Natasha Herliana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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a. Explain the possibilities of fraud scheme conducted by Eddie Company!

(30%)

Fraud is carried out by increasing the value of the inventory and recording a lower debt. For inflating the inventory value, C
manipulated the inventory calculation card, namely by still entering the inventory value of the goods to be returned to the
goods that were waiting for delivery back to the vendor, and includes inventory that has not been recorded in stores prior
inventory and auditor observations. Therefore, purchases have not been recorded, but inventories have been included in e
Sales increase by recognizing the delivery of goods from one store to another as a sale.

b. Indicate what kinds of audit procedure you chose in order to detect potential misstatement or fraud based on those table! (

- Design and perform tests of controls, analytical procedures, perform substantive tests, and tests of details of balances relat
accounts payable and sales.
Request information about audit procedures that have been carried out by internal auditors in identifying and detecting fra
- management's response to the results of audit procedures that have been carried out (if Crazy Eddie has an internal audit).
Evaluating unusual or unexpected relationships that have identified, particularly in relation to revenue accounts, which can
- there is a risk of material misstatement that caused by fraud.

c. Calculate these two ratios for each year from above data, and then provide analysis according those calculation! (20%)
- Days Sales Inventory ratio (Inventory/cogs)*365

Year 1 Year 2 Year 3 Year 4 Year 5


Day Sales inventory 79 76 73 112 146

it can be seen that the dsi ratio has increased very rapidly in the 4th and 5th years. this shows unfavorable results because
ratio increases, the company takes longer to concert inventory into sales. Also a high DSI may indicate that a business is no
managing its inventory or that its inventory is difficult to sell.

- Account Payable/Inventory Ratio Total Purchases / Account Payable


Total Purchases Ending Inventory + COGS

Year 1 Year 2 Year 3 Year 4 Year 5


AP Ratio 7.4 7.0 6.6 4.9 7.6

it can be seen that the ap ratio decreases every year. this shows the company takes longer to pay off trade debts. Of course
not a good thing.
d. What action or additional audit evidence will you collect next to follow up this audit findings? (30%)

Physical examination = Physical evidence gathered by the auditors themselves to verify whether or not certain assets actua
verify the asset’s condition. Physical examination is also a main source of audit evidence used primarily for any fixed assets
machinery or supplies.
ting the inventory value, Crazy Eddie
oods to be returned to the vendor and the
n recorded in stores prior to the physical
es have been included in ending inventory.

ud based on those table! (20%)

of details of balances related to inventory,

entifying and detecting fraud, as well as


ddie has an internal audit).
venue accounts, which can indicates that

ose calculation! (20%)

favorable results because when the dsi


dicate that a business is not properly

y off trade debts. Of course this is


or not certain assets actually exist, or to
marily for any fixed assets, such as usage of

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