Apollo Shoes Case Report

1781 Words 8 Pages
Mrs. Wardlaw, I am reaching out to you today to discuss the possibility of fraud within the Apollo Shoes financial statements. After reading through some company documents in preparation of this Audit I have noticed multiple red flags that although in themselves do not constitute fraud outright, they do demand that we investigate this issues further to ensure fraud is not taking place. Through my initial research I believe the possibility of fraud at Apollo Shoes to be very high, and as such we must take precautionary measures to avoid risk falling back on the firm. In my next paragraphs I will outline some of the questionable practices I have noticed from the board of directors meeting minutes, and my analytical review, and why these factors …show more content…
Generally sales and accounts receivable have a pretty predictable positive relationship in that as long as the percentage of sales that are on credit/ cash are consistent these accounts should move in the same direction. This huge gap between accounts receivable and sales should be investigated to make sure these are real sales, and not fake sales, or a channel stuffing scheme to increase the overall outlook of the financial statements. In addition to this major increase in accounts receivable you would also expect allowance for doubtful accounts, and bad debt expense as ratio of accounts receivable to stay pretty consistent, but as AR increases 214% allowance for doubtful accounts decreases 2%, and bad debt expense has a zero balance. The company’s aggressively optimistic policies on the collectability of accounts receivable are concerning as they again could be motivated to increase the attractiveness of the company’s financials in order to meet the board’s goals. These financials whether a mistake, or recorded purposefully are unacceptable, and need to be investigated and rectified …show more content…
First off this risk forces us to assess a lower level of materiality on the audit. In my professional opinion with all of the glaring risks I recommend that we set a performance materiality of $500,000 or .2% of sales, with a planning materiality of $50,000. With such low materiality and high fraud risk all auditors should be experienced staff auditors, and be on high alert of fraudulent information from Apollo employees, and must be diligent in keeping auditing procedures unpredictable as to not allow employees to cover their tracks. With the risks outlined, and the low materiality level we will need to conduct a significant amount of substantive tests, because it is the only way to get the detection risk to an acceptable level with how high the clients control risk is. To do this we will need to perform substantive testing on at least Accounts receivable, sales, Inventory, Accounts payable, expenses, prepaid expenses, and

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