Fraud Case Studies

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Bridget Carter
July 30, 2010
ACCT 461

Regina Company, Inc.

1.Please find the attached excel spreadsheet showing the financial statements, and key ratios. Given the data computed, there are some interesting numbers that seem to appear. Firstly, in the income statement, while sales seemed to rise over the 3 years, the percentage of cost of goods sold to those sales went down. It would be an important point to look at inflation, to see if sales prices went up, and people were still willing to buy expensive items, while the cost of making those items decreased. From researching that information, it would be smart to think that if a cheaper made product goes out, it has a greater chance of being faulty, and to then look at return issues.

Next, looking at the balance sheet, the amount of net income for 1987 and 1988 compared to cash, accounts receivable, and inventories seems hard to come by. Cash rose from $63,000 to almost $900,000 in two years. Property, Plant & Equipment dropped in comparison of percentage to total assets. How could Regina lose these items, while producing a variety of new products at the same time? Wouldn’t they need new equipment in order to build the new products?

When looking at the key business ratios, the numbers are more startling and easier to see. In 1987, the current liabilies to net worth ratio showed at 120%, meaning it would be very difficult for Regina to pay their current debts, if needed, with the equity of the company. In 1988, it was just below 80%, which is the red flag for current creditors. Regina’s reliability on inventory to pay current debts dropped in half from 123% in 1987 to just below 60% in 1988. How did their other current assets rise to take the burden off of inventories? Time to look at Accounts Receivable. ‘

High-risk items to look at would be the Accounts Receivable, Sales, and Cost of Goods Sold. A/R was taking much longer to get payments back on, even though while sales rose, its percentage in relation to those sales stayed exactly the same. Sales were rising, yet COGS were going down. And Inventory, compared to the sales account went down; All noteworthy items to investigate further. 2.a. There are a few audit procedures that would have helped in realizing the bogus sales recorded by the Regina executives during 1988. These 200 invoices were created during the 4th quarter. The previous three quarters it seemed as if Regina was not going to hit the goals that Sheelen had set out. An auditor should have looked at numbers per quarter, and been able to see the suddenly huge jump in the final quarter of the fiscal year. This would have been a red flag to investigate those sales further to see if they were legitimate. This would have been done by performing analytical procedures using disaggregated data by quarter, while also confirming those sales with the customers. These orders were processed electronically, so SAS 99 also suggests testing the controls of the programs for assurance that the transactions occurred and were properly recorded. Considering that the false invoices were created in amounts exactly equal to previous real invoices for the same customer, it should have been a major red flag to test them for doubling. b.In identifying the understatement of the company’s sales returns, while the auditor was confirming sales records, contact with customers would have resulted in uncovering large amounts of returns, by unhappy final users. One company even reported 50% of their Regina sales were returned. This would not have been overlooked or untold in a simple conversation with this particular supplier. The quantity of returns was not shown in the statements given in the article, but an auditor would have looked at those numbers in comparison with sales and either seen that they dropped dramatically in relation, to, or stayed very much the same. Either way, it would have easily been something to look at and find the truth quickly. 3.The...
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