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Crazy Eddie - Case Study Example

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99 (SAS 99), must be responsible for detecting any misstatement in the financial statements of a company. Such misstatements might arise either from an error of intended fraud caused by officials. SAS 99 is,…
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Crazy Eddie
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Crazy Eddie Number: Lecturer: Crazy Eddie Auditors, according to the ment on Auditing Standards No. 99 (SAS 99), must be responsible for detecting any misstatement in the financial statements of a company. Such misstatements might arise either from an error of intended fraud caused by officials. SAS 99 is, therefore a tool to give an auditor a focused clarified guidance while carrying out their duties and responsibilities in uncovering fraud. Proper control of a company must be instituted by both internal and external auditors. Internal controls act as barriers to crime activity and help business operate more efficiently and effectively. Internal auditors are responsible for fraud at Crazy Eddie as they are the ones committing and concealing fraud to both external auditors and the general public (Buchholz, 2011). .
1. Computation of annualized gross margin ratio and inventory turnover ratio year ending 3rd March 1985
i) Gross margin ratio
Net sales =$167.2 million
Cost of sales (COS) =$127.7 million
Gross margin ratio= Sales-COS
Sales
=167.2-127.7
167.2
=0.24, or 24%

ii) Inventory turnover ratio
= COS
Ending inventory
= 127.7
26.5
= 4.82, or 482%
The computations above do not indicate any problem at Crazy Eddie. The gross margin ratio of 24%, though it might not be conclusive, shows that the company is operating a healthy business and might be able to service its operating expenses. The inventory turnover ratio too, indicates that the company turnover is high and hence healthy at 482%.
2. There were several barriers to independence at Crazy Eddie. Auditors at Crazy Eddie’s case were not able to detect fraud due high-level fraud cover up from suppliers’ side to its consumers. Fraud occurred on many fronts; liabilities and expenditures, asset valuations, fictitious revenue, disclosures and accounting period differences. Liabilities and expenses were concealed like unpaid bills wouldn’t be declared and paid in the next financial year of held for long periods. Accounting periods would not be cut off at regular intervals in order to add good sales occurring after what should have been a closed book, to inflate revenue falsely. On assets, some were overvalued or the company employed tricks like borrowing the merchandise that would not be paid for immediately. They also used to ship stock from one store to another as auditing was spread out in stores hence double-counting (Knapp, 2013).
3. If I were a partner to audit Crazy Eddie, I would accept to audit this company thoroughly as it was a family entity with all management positions reserved for family members. This was one sign of some weakness as family members can manipulate accounting procedures, and lack of proper conduct can be compromised. Very important too, was the fact that this company was characterized by hype about its success. The crazy hype should be a point to make a keen auditor want to dig the underlying structure behind the hype. Lastly, I would audit to get an accurate picture of the health of Crazy Eddie as it prepares to sell stake to members of the public. On the contrary, I wouldn’t wish to audit the company because of the available time given for the audit. The time was short such that one can’t be able to concentrate and be extra keen. The company used to give an impression that inventory was a lot often stacked to the roof and would, therefore, need the help of internal staff in counting hence would hinder auditor’s independence. Another loophole that existed was the successive audit of different branches of its stores across several states. Some stock would be rotated such that double or triple counting of the same stock would take place (Knapp, 2013).
4. SAS 99 might have handled the situation better to detect and prevent fraud occurring at Crazy Eddie as it prescribes a process by which a good audit must go through to its conclusion. It strengthens audit procedure to ensure financial statements are free of any material misstatement caused by fraud. It has a logical thought process that is undertaken from the initial planning to final reporting. It contains what is called a fraud triangle centering on three main reasons as to why a fraud would take place; incentives/pressures, opportunities and attitudes/rationalizations. Incentives are reasons why a fraud can occur which include the desire to gain economically from greed. An opportunity arises from the lax in internal control hence a fraudster can circumvent the checks and commit frauds. Lastly, attitudes f an employee to commit fraud occurs out of the kind of treatment one is facing in an employment relationship, especially if it is characterized by displeasure and dissatisfaction (Buchholz, 2011).
Works Cited
Knapp, M. (2013). Contemporary Auditing: Real Issues and Cases (9th Ed). USA. South Western. Cengage Learning.
Buchholz, A. (2011). SAS 99: Deconstructing the Fraud Triangle and Some Classroom Suggestions. New York. Brooklyn College of the City of New York. Read More
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