Case 1.8 Crazy Eddie Essay

1060 Words Dec 9th, 2011 5 Pages
Crazy Eddie, Inc.

Question 1
Key ratios and other financial measures:

|Pro Forma Balance Sheet Ratio |1984 |1985 |1986 |1987 | |
|Account Receivable |7.12% |4.18% |1.77% |3.68% | |
|Merchandise Inventories |63.83% |40.51% |47.16% |36.99% | |
|Account Payable |54.98% |35.22% |40.74% |16.96% | |
|Accrued Expenses |16.62% |13.33% |13.49% |1.90% | |
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The firm’s cost of goods sold did not change but the inventory turnover only decreased a little from 1986 to 1987. • When the firm’s inventory increased drastically, its account payable should have increased accordingly, the account payable was decreased from $52 Million in 1986 to $50 Million in 1987. This is a risk in the financial statement. • The firm’s current assets were drastically increased as inventory increased, but the accrued expenses were decreased from $17 Million in 1986 to $6 Million in 1987. This does not meet the usual expectation following previous terms.

Question 2
a. Falsification of inventory count sheets: • This could have been prevented if the auditors were observing random cycle counts. • If the auditors randomly performed cycle count audits. • If the auditors observed an entire physical inventory.

b. The bogus debit memos for accounts payable: • The auditors could have confirmed balances with the debtor

c. The recording transshipping transactions as retail sales: • Observe flow of transactions for recording a transshipping sale. • Audit the receipts of very large sales since transshipping sales are going to be very

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