Inventory-Related Fraud Detection: Case Analysis: Fraud
Inventory-Related Fraud Detection:
• Beside revenue related fraud, the Antars also overstated their inventory. If inventory is overstated, the cost of goods sold is understated, and gross margins and net incomes are overstated. o Crazy Eddie had a close relationship with one of their vendors known as Wren Distributors. Crazy Eddie was Wren’s largest customer, accounting for 35% of their revenues. o Crazy Eddie ordered 10% of their total inventory from Wren so Sam Antar asked Wren to ship $3 million to $4 million in merchandise before year end, but to hold billing until after the auditors completed the year-end audit. o Because the merchandise was included in the year-end inventory count without recording the corresponding accounts payable …show more content…
Identifying Inventory-Related Fraud Symptoms:
Analytical symptoms:
After the Crazy Eddie asked one of their vendors known as Wren Distributors to ship them $3 million to $4 million in merchandise before year end, they also asked the vendors to hold the billing until the auditors completed the year-end audit, their inventory balance appeared too high than the regular which signaled the possibility of the fraud inside the company.
Accounting symptoms:
After the inventory was ordered, Crazy Eddie had hold the billing procedures till the auditors completed year-end audit. Hence, it is obvious that the transaction was not recorded in the complete manner and that significantly changed the entity’s financial position at the end of the year. In addition to that, they hadn’t supporting documents and bills related to the purchase of the inventory and if the auditor had counted the inventory by themselves, they would have also found that there were not enough inventory as mentioned by the employees of Crazy Eddie. Collectively, all these symptoms indicates that the fraudulent activities going on inside the …show more content…
First way is to wait until you find it out by chance.
2. Second way is to proactively search for the possible symptoms
• In the case of Crazy Eddie, the fraud could have been found much earlier if the auditors had looked for the possible fraud symptoms. But the auditors didn’t even complete the adequate auditing procedures while auditing Crazy Eddie’s financial documents. Hence, there was not even the chance of actively looking for the fraud symptoms. But, there were numerous fraud symptoms in front of them, and if they had paid close attention to them Crazy Eddie would not have turned into a fraudulent enterprise:
Analytical Symptoms:
• The inventory embezzlement was done at the end of the year, which unrealistically increased the net income of that period. So if the auditors were aware, they could have compared the net income and cash flows with the previous periods and realized the fraud symptoms.
• Auditors could have used the horizontal analysis, where the percentage change in the account balance from period to period is measured. The increased inventory basically results in understated cost of goods sold and overstated net income. Hence, the analysis of the percentage change compared to previous period helps to figure out the possible
• Beside revenue related fraud, the Antars also overstated their inventory. If inventory is overstated, the cost of goods sold is understated, and gross margins and net incomes are overstated. o Crazy Eddie had a close relationship with one of their vendors known as Wren Distributors. Crazy Eddie was Wren’s largest customer, accounting for 35% of their revenues. o Crazy Eddie ordered 10% of their total inventory from Wren so Sam Antar asked Wren to ship $3 million to $4 million in merchandise before year end, but to hold billing until after the auditors completed the year-end audit. o Because the merchandise was included in the year-end inventory count without recording the corresponding accounts payable …show more content…
Identifying Inventory-Related Fraud Symptoms:
Analytical symptoms:
After the Crazy Eddie asked one of their vendors known as Wren Distributors to ship them $3 million to $4 million in merchandise before year end, they also asked the vendors to hold the billing until the auditors completed the year-end audit, their inventory balance appeared too high than the regular which signaled the possibility of the fraud inside the company.
Accounting symptoms:
After the inventory was ordered, Crazy Eddie had hold the billing procedures till the auditors completed year-end audit. Hence, it is obvious that the transaction was not recorded in the complete manner and that significantly changed the entity’s financial position at the end of the year. In addition to that, they hadn’t supporting documents and bills related to the purchase of the inventory and if the auditor had counted the inventory by themselves, they would have also found that there were not enough inventory as mentioned by the employees of Crazy Eddie. Collectively, all these symptoms indicates that the fraudulent activities going on inside the …show more content…
First way is to wait until you find it out by chance.
2. Second way is to proactively search for the possible symptoms
• In the case of Crazy Eddie, the fraud could have been found much earlier if the auditors had looked for the possible fraud symptoms. But the auditors didn’t even complete the adequate auditing procedures while auditing Crazy Eddie’s financial documents. Hence, there was not even the chance of actively looking for the fraud symptoms. But, there were numerous fraud symptoms in front of them, and if they had paid close attention to them Crazy Eddie would not have turned into a fraudulent enterprise:
Analytical Symptoms:
• The inventory embezzlement was done at the end of the year, which unrealistically increased the net income of that period. So if the auditors were aware, they could have compared the net income and cash flows with the previous periods and realized the fraud symptoms.
• Auditors could have used the horizontal analysis, where the percentage change in the account balance from period to period is measured. The increased inventory basically results in understated cost of goods sold and overstated net income. Hence, the analysis of the percentage change compared to previous period helps to figure out the possible