2 . If better, more complete audit procedures were performed, it is likely that many of the major accounting irregularities and fraudulent practices could have been uncovered. a) The falsification of inventory count sheets: The auditors could have conducted full physical inventory counts, or performed random inventory counts at warehouses or stores undisclosed to the management at Crazy Eddie prior to the tests. This would have prevented the management from strategically shipping inventory from locations that were going to be audited to those where the misstatements would not be detected. Additionally, they could have preformed or observed random cycle counts. The fact that they switched from the computer-based inventory system that was designed by Main Hurdman, back to the manual system should have served as a red flag to encourage the auditors to look more closely at their inventory records and their reasoning for going back to less efficient, outdated methods. b) The bogus debit memos for accounts payable: The auditors should have done testing on the accounts payable transactions and records. They could have confirmed balances with the debtors and requested proof of random transactions and payments from both Crazy Eddie and the debtors. If this revealed any discrepancies, the auditors should have followed up with the third parties until the source of the errors or discrepancies were discovered. If the auditors questioned the appropriate staff of Crazy Eddie and did more complete investigating, they could have discovered the bogus debit memos. c) The recording of transshipping transactions as retail sales: The auditors could have requested receipts for sales over some established threshold in order to verify their accuracy, completeness, and existence. Since the transshipping sales were likely very large transactions, closely auditing larger transactions for validity could have detected this activity. The...
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