1. 2 cases which companies have committed fraud by misstating inventory: •Rocky Mount Undergarment Company, Inc.
•Leslie Fay Company
2. Intentional misstatements of inventory is difficult to detect, as was in the case of
Phar-Mor, Inc., because of the collusion by employees and/or management to commit fraud.
3. Coopers & Lybrand won the Phar-Mor, Inc. account with a very low bid, so they wanted to limit their costs by testing only 4 out of the 129 stores. Phar-Mor made false entries to the inventory records to cover up money embezzled by management and they did this by monitoring the auditors’ test count procedures and found out which 4 stores were being tested in advance. This gave them the opportunity to stock up chosen stores with inventories from other locations and adjusted the books accordingly.
4. Some audit procedures that can detect overstatement of inventory: •Pay attention to the management assertion that inventory quantities exist. •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.
5. Factors at Phar-Mor, Inc. contributing to 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.
6. The responsibility of an auditor is to present fairly an opinion of the financial statements management has prepared. Auditors’ should be alert and skeptical with the evidence gathered or that management has provided, but it is not their responsibility to seek out or dig up evidence of potential wrong doings. However, if evidence shows that a possible misstatement is present, then it is their responsibility to test the evidence to prove whether it is material or...