Nefret Stores Case Summary

1187 Words 5 Pages
1. INTRODUCTION
An investigation carried out by Income & Sales Tax Department disclosed that Nefret Stores, a large discount cosmetic department store chain, understated accounts payable and recorded fictitious supplier credits. Therefore, Nefret’s audit firm, Abdul & EL-Emir tested their accounts payable and supplier credits including supporting advertising credits, Nashwa credits and Zaki credits.
2. CASE ANALYSIS
2.1 Advertising Credits
In this case, there were only 8 out of 2,500 confirmations were sent. The sample size was too small to assess the risks of material misstatement. Therefore, the number of the confirmations was insufficient. It violated the principle of sufficiency, which is one of the determinants of persuasiveness of evidence.
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Nefret explained it was due to the return of overstocked goods from several Nefret stores. Later, the auditor noticed that a sentence as “Do not post until merchandise received” on the credit memos from Zaki had been obliterated by a felt-tip marker, which meant that Nefret could not reduce its payable until the returned goods were received by Zaki. The auditor thereafter called Omar Zaki, the treasurer of Zaki, Inc.and was informed that the $130,000 in goods had not been returned and the money was not owned to Nefret by Zaki, which statement was totally different from the Nefret …show more content…
In this case, to improve the reliability of the evidence, it would be more reliable for auditors to obtain evidence from source outside Nefret than from within. For example, checking vendor’s credit memos is better than tracing to Nefret’s cash receipts. Besides, objective evidence is more reliable than evidence that required considerable judgment for determining its correctness, e.g. testing supporting advertising credits by examining the advertisements placed. Also, evidence obtained directly by the auditors liked obtaining written confirmation would be more sufficient than placing a call

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