Financial Statement Fraud Schemes - Essay Example

 Financial Statement Fraud Schemes: Apollo Shoes Company Introduction Apollo Shoes Company deals with production of various types of shoes that include: common athletics shoes branded as SPOTLIGHT, the Police shoes branded as SIREN and athletes shoes with speakers branded as SPEAKERS shoes (Timothy, Loretta, & Kenneth, 2011). Currently the company is in a process of expanding the products it offers by making different types of shoes that meet different markets demands. For example the company is in the process of manufacturing PHONESHOES that are specifically designed for helping business executives to carry out their operation more efficiently and effectively (Timothy, Loretta, & Kenneth, 2011). This case involves several characters, namely; Mr. Karina Ramirez, the director internal auditor at Apollo Shoes Company, the engagement manager Mr. -Darlene Ward law, Mr. Arnold Anderson the engagement partner and the intern Bradley Crumpler (Timothy, Loretta, & Kenneth, 2011). The communication in this company entails the use of email messages because physical interaction is limited between the employees (Timothy, Loretta, & Kenneth, 2011). Based on this case it can be scrutinized that the company accountants has not been ensuring that all items are properly recorded for easy audit. Additionally, the company does not have enough experts to carry out audit work (Timothy, Loretta, & Kenneth, 2011). This can be scrutinized with a scenario where an intern was incapable of making necessary entries in the books of accounts as other members were busy doing other duties (Timothy, Loretta, & Kenneth, 2011). Poor financial management has subjected customers to financial difficulties and this has made the company fail to accomplish goals and objectives. This can be substantiated by in the director statement when he asserted that the company sales was not strong and therefore there was a need to relook on the marketing plan(Timothy, Loretta, & Kenneth, 2011). 1. Identify potential financial statement fraud schemes would likely be present in Apollo Shoes Company The financial statements fraud schemes has been presented in the Apollo’s Company case in numerous ways. There have been some underlying discrepancies between the figures in the financial statement and director’s reports (Timothy, Loretta, & Kenneth, 2011). For example the audited financial statement indicated that Inventories were valued at $18,825,205.24 while unaudited financial statements indicated that inventories were valued at $$67,424,527.50 (Timothy, Loretta, & Kenneth, 2011). This shows that there was a discrepancy of $48599322.26 obtained by finding the difference between the unaudited and audited financial figure which is a clear indication that fraud was taking place (Timothy, Loretta, & Kenneth, 2011). Additionally, inventories were valued at $18,825,205 in the year 2010 while reserves were valued at $3,000,000 (Timothy, Loretta, & Kenneth, 2011). This shows that there was an approximate of fifteen percent reserves in the company. On the contrary, inventories were valued at $67,424,527 in the year 2011 while company reserves were valued at $867,000 indicating that there were only 1.2% reserves (Timothy, Loretta, & Kenneth, 2011). The above discrepancy was so wide and therefore it is a clear sign that fraudulent acts were taking place in Apollo’s company (Timothy, Loretta, & Kenneth, 2011). In above connection, it can be scrutinized that the company did not established measures to safe guard shareholders interest. For instance; between 2009 and 2010, revenues were reported to increase from 10% to 15 % respectively and that customers were allotted a fair share according to the directors’ report (Timothy, Loretta, & Kenneth, 2011). However, this was not the case because the figures could not be reflected in the books of accounts. Additionally, it has been reported that customers were undergoing via financial difficulties (Timothy, Loretta, & Kenneth, 2011). 2. Describe the types of evidence you would look for to determine whether fraud is occurring. There is substantial evidence that indicates fraudulent acts that were taking place in the Apollo’s Shoe Company. It has reported that, it was not easy to track Apollo’s company personnel that were responsible for preparing financial statement. Therefore, it was very difficult for an auditors to track them because communication was only through emails and therefore, this is clear indications that fraud was taking place (Timothy, Loretta & Kenneth, 2011).In above connection, it has been reported that it was not easy to observe, inquire or even to track what was taking place in this company (Timothy, Loretta & Kenneth, 2011). This is because there were no clear documents that could help to carry out this exercise; this is clear evidence that fraud was taking place in Apollo’s Shoe Company (Timothy, Loretta & Kenneth, 2011). In above connection, the auditors massaged the financial data by creating figures that overstated earning (Timothy, Loretta & Kenneth, 2011). This massaging was done in order to fool shareholders that the company was performing well which was not actually the case as the audited reports indicates that the company was almost collapsing(Timothy, Loretta & Kenneth, 2011) 3. Write a business brief outlines how you will use the substantive procedures to analyze potential schemes. Substantive procedure involves creating evidence to aims at detecting misstatement on whether there was accuracy, completeness, existence, with respect to ay assertions made when preparing financial reports (Puttick, Van & Kana, 2007). The procedure may involve the following activities; observing, inquiring, testing balances in the financial statements, transaction testing and confirmation of whether the inventories on site tally with those in records (Albrecht, 2012). In above connection, it may involve conducting inventory physical count, conducting revenues testing, assets testing, liabilities as well as expenses analysis (Puttick, Van & Kana, 2007). Therefore, in this case the substantive procedure will begun by scrutinizing the director’s report and comparing whether what has been reported tallies with figures captured in the financial statements (Albrecht, 2012). The inventory count will be conducted to determine whether the actual inventories tally with recorded inventories (Petrucelli, 2013). In above connection, observations and inquiries will be carried out to verify whether the figure recorded present the actual state of affairs on the ground. The substantive procedure on Apollo’s Shoe Company has been summarized in the diagram below, indicating how substantive procedure will be conducted. Source: Puttick, Van & Kana, 2007 Conclusion Therefore, based on the above it can be scrutinized how the fraudulent act were taking place in Apollo’s Shoes Company. The various financial statements fraud schemes have been identified as well as evidence portraying that fraudulent acts were taking place. Conclusively the substantive procedure t be followed has been identified and discussed. References Albrecht, W. S. (2012). Fraud examination. Mason, OH: South Western, Cengage Learning. Puttick, G., Van, E. S. D., & Kana, S. P. (2007). The principles and practice of auditing. Lansdowne [South Africa: Juta. Petrucelli, J. R. (2013). Detecting fraud in organizations: Techniques, tools, and resources. Hoboken, N.J: Wiley. Timothy, J. L., Loretta, M.M & Kenneth, R.J. (2011) “Apollo Shoes, Inc An Audit Case to Accompany: Auditing and Assurance Services”. Retrieved :< http://highered.mcgrawhill.com /sites/0073379 360/ student_view0/apollo_shoes _case.html>. On 21st February 2013. Read More