Crazy Eddie Case

Topics: Auditing, Financial audit, Internal control Pages: 5 (1471 words) Published: June 18, 2013
crazy eddiCase 1.8
Crazy Eddie, Inc.

Term A2/Spring 2013
March 19, 2013
Table of Contents
Issues…………………………………………………………………………………………...3 Facts…………………………………………………………………………………………….4 Analysis and Conclusions…………………………………………………………………….6 Conclusions…………………………………………………………………………………….9

Issues
1. Compute key ratios and other financial measures for Crazy Eddie during the period 1984-1987. Identify and briefly explain the red flags in Crazy Eddie’s financial statements that suggested the firm possess a higher-than-normal level of audit risk. 2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities perpetrated by Crazy Eddie personnel: (a) the falsification of inventory count sheets, (b) the bogus debit memos for accounts payable, (c) the recording of transshipping transactions as retail sales, and (d) the inclusion of consigned merchandise in year-end inventory. 3. The retail consumer electronics industry was undergoing rapid and dramatic changes during 1980s. Discuss how changes in an audit client’s industry should affect audit planning decisions. Relate this discussion to Crazy Eddie. 4. Explain what is implied by the term lowballing in an audit context. How can this practice potentially affect the quality of independent audit services? 5. Assume that you were a member of Crazy Eddie audit team in 1986. You were assigned to test the client’s year year-end inventory cutoff procedures. You selected 30 invoices entered in the accounting records near year-end: 15 in the few days prior to the client’s fiscal year-end. And 15 in the first few days of the New Year. Assume that client personnel were unable to locate 10 of these invoices. How should you and your superiors have responded to this situation? Explain. 6. Should companies be allowed to hire individuals who formerly served as their independent auditors? Discuss the pros and cons of this practice.

Facts
* By 1987 Antar’s firm Crazy Eddie, Inc. had 43 retail outlets, sales exceeding $350 million and outstanding stock with a collective market value of $600 million. * In the late 1980s Crazy Eddie collapsed following allegations of extensive financial wrongdoing by Antar and his associates. * After the take over the new owners discovered that Crazy Eddie inventory was overstated by more than $65 million. Eddie Antar and his subordinates had grossly overstated Crazy Eddie’s reported profits throughout its existence. * Antar’s most distinctive trait was his inability to trust anyone outside of his large extended family. His closest relatives would assume leadership positions with Crazy Eddie. * In the early 1980s sales in consumer electronics industry exploded, doubling in the four-year period from 1981 to 1984 alone. * In 1983 Crazy Eddie went public. The underwriting firm retained by Antar delayed the IPO due to several accounting irregularities in the Company. * Extensive investigations of Crazy Eddie’s financial records by the new owners and regulatory authorities culminated in fraud charges being filed against Eddie Antar and his former associates. * The SEC found that after the company being public Antar ordered a subordinate to overstate inventory by $2 million and the next year for $9 million. He also used other fraudulent tactics such as transshipping transactions. * In 1989 Crazy Eddie filed chapter 11 bankruptcy petition after losing its line of credit. * Antar was arrested and convicted of fraud 17 counts of financial fraud including racketeering and conspiracy. After an agreement reached between Antar’s attorneys and Federal Prosecutors he was sent to prison for 7 years serving only two years.

Analysis
1. Calculation of Ratios based on the Financial Statements. item| 1,984 | 1,985 | 1,986 | 1,987 | Sales| 137,285 | 136,319 | 262,268 | 352,523 | COGS| 106,934 |...
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