Crazy Eddie Essay

2267 Words Aug 19th, 2010 10 Pages
Crazy Eddie Case Questions
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 posed a higher-than-normal level of audit risk. There were several red flags in Crazy Eddie’s financial statements. The company’s higher-than-normal level of audit risk can be determined by completing a ratio analysis of the financial statements. An analysis of key ratios over the period of 1984 to 1987 would have resulted in red flags. Crazy Eddie’s change in assets between this period is one red flag that an auditor should have noticed. Short-term investments had a zero balance until 1986 when it dramatically
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An understanding of the clients and its environment encompasses the following: * The nature of the client, including the client’s application of accounting policies. * The industry, regulatory, and other external factors affecting the client. * The client’s objectives and strategies and related business risks. * Methods used by the client to measure and review performance. * The client’s internal control. From the several first years of the 1980’s, the prosperous electronics industry and the increasing market demand created numerous opportunities for Crazy Eddie to expand. Auditors should have paid special attention to the client’s internal control, organization structure, governance processes, and accounting policies to see if they were adapted properly to the company’s rapid growth. When company’s experience rapid growth, internal controls are usually not adjusted in a timely manner resulting in weak internal controls. Due to the fast expansion of the company, investors’ attention are not drawn to investigating whether internal controls are weak, leaving potential risks. As Crazy Eddie grew rapidly around the early 1980’s, the company purchased large quantities of electronic products from its suppliers at big

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