Knapp Case 1.8

Eden Mims Case 1. 8 Crazy Eddie, Inc. 1) The following table professional personvides depict financial ratios for Crazy Eddie during the period 1984-1987 1987 1986 1985 1984 Current Ratio 2. 41 1. 4 1. 56 0. 93 Quick Ratio 1. 4 0. 6 0. 77 0. 15 Debt Ratio 0. 68 0. 66 0. 64 0. 83 Debt-to-Equity 2. 16 1. 98 1. 75 4. 88 Inventory Turnover 3. 23 4. 38 5. 14 5. 8 Asset Turnover 1. 2 2. 07 2. 08 3. 75 ROA 0. 04 0. 1 0. 09 0. 1 Return on Equity 0. 11 0. 31 0. 25 0. 61 Gross Profit Margin 0. 23 0. 26 0. 24 0. 22 Red Flags the Inventory turnover rate station steadily declines from 1984-87, which could indicate, befuddled sales. Misstatements of inventorying or cost of goods sold could be possible.It also indicates employee strikes or, in Crazy Eddies case, employees leaving their jobs. In 1986 the A/R turnover rate was extreme ly lofty which is unusual because in that division the consumer electronics industry pan gravy days had ended. Competition in the New York atomic number 18a was high. Inventory turnover range had been decreasing. Extremely high A/R turnover rates ar and indicator of credit and collection policies that are too limiting 2. Accounting irregularities could gain been found sooner if some scrutinise procedures were performed. a) falsehood of inventory count sheets This could have been prevented if the auditors were observing random cycle counts, if the auditors haphazard performed cycle count audits, or if the auditors observed an entire physical inventory. (b) faux debit memos for accounts payable The auditors could have con souseded balances with the debtor. (c) Recording transshipping transactions as retail sales Observe flow of transactions for recording a transshipping sale. Audit the receipts of precise large sales since transshipping sales are leaving to be very high in ollar amount. (d) Inclusion of consigned trade in in year-end inventory Auditors could have observed an entire year end physical inventory in all warehouses and not just now a specific one that they tell the client they are going to. 3. Retail electronic stores changed drastically during the 1980s, so did Crazy Eddies business. A factor in the Crazy Eddie case had to do with the inventory organism overvalued. A small reason for why the inventory was overvalued is due to the quick decreasing prices in electronics due to constant cleansements in technology.Electronics are show up dated very fast if not sold upon arrival, they are everlastingly being improved on, and so electronic stores need to have a high inventory turnover. If not, whence at that place is a chance that the inventory can become overvalued if the auditor does not stay up on the latest in electronics. Another change was with how Crazy Eddie was able to corrupt in such large amounts that he was able to sell via drop-shipments, this is something that the auditors are not used to because it is not a common occurrence.The drop-shipments would affect sales, save it should not affect inventory. As understandn in this case, it required special guardianship because same store sales were increased by the way drop-shipments were enter as revenue. All in all, if an industry is rapidly changing then so should the plan for the audit. It is very important to whap how the industry is doing so it can be compared to the company that is being audited. 4. The term lowballing is when the auditors sell the audit services very cheap in order to get very lucrative consulting deals with the client.This can jeopardize the truthfulness of the audit because the auditors may have to agree with the client on something that will affect the audit sentiment in order to keep the client on their good place so they can keep the client as a consulting node also. 5. Locating only 20 of the 30 invoices requested i s a major problem. I would first see if the invoices were tied to another form the likes of a sales order. If those can be located, then we can see if the 10 missing invoices had something similar on the sales order.Another action that should be taken is to have the auditor observe an entire transaction from blow up to finish seeing why an invoice may get lost. If there is no good reason, then there is a very high likelihood that there is fraud involved. Other information will stock-still need to be obtained getting it from the information system may be a possibility. This issue should be discussed further with management since it is likely that the psyche who prepares the invoices or files the invoices is very low on the staff. 6.This article was written to begin with the accounting laws were changed because of problems encountered by ex-auditors working at the client, and having connections with the new auditors. This caused many problems exemplified by Enron and WorldCom. Th at is why it is no longer allowed to take a job with the client. I agree with the law at present, based on the fact that in the lead the law was present, major fraud occurred that couldve been prevented had hiring their old auditors been illegal and of course many other things, but it is still helpful in prevention.The only pro I can think of is the fact that the independent auditor would know a lot about the business and possibly help improve information systems and such. However, that is only if they are being hired for that certain job. That brings to the cons, which could be the auditor could help with hiding fraud since they know how to look for it in that specific company. Also, they are still in connection with their old firm and that could bring problems when the new independent auditor comes in.