Auditing and Inventory Fraud Cases

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Question 1: Name two cases in which companies have committed frauds by misstating inventory. Crazy Eddie and Goodner Brothers case are the good example for the inventory fraud cases.

Question 2: What makes the intentional misstatement of inventory difficult to detect? When you have the most senior management of the company, particularly its financial management, consciously setting out to fool the auditors, to hide information from them, as they testified in the Monus trial, it's very hard to get around that kind of activity by the- by the senior management.

Question 3: How was Phar-Mor successful in fooling Coopers & Lybrand? Auditors can't check the entire inventory in every story. Moreover, Coopers, having won the Phar-Mor account with a very low bid, wanted to limit its costs, so Coopers checked only four stores out of 129. And get this. Phar-Mor found out from Coopers which locations would be checked months in advance. So when Coopers arrived to examine the stores, it's not too surprising that everything appeared to be in order.

Question 4: What are some audit procedures that can detect overstatement of inventory? •Pay attention to the management assertion that inventory quantities •Review their inventory counting procedures.

Observe client count of inventory quantities.
Test count a sample from the population.
Trace the test counts to the final inventory listing prepared by client.

Question 5: List several factors at Phar-Mor that would have contributed to a high inherent risk. •Growing competition in the industry, for example, Wal-Mart. •With growing competition comes pricing wars; pressures to keep low prices. •Financial pressures from banks and investors that expect continuous growth. •CEO’s gambling operating strategy, for example, WBL

CEO’s characteristic, for example, cares more about his reputation than the financial position of the company.

Question 6: Should auditors have equal responsibility to detect errors &...
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