Knapp Case 1.8

Eden Mims Case 1. 8 unrestrained Eddie, Inc. 1) The following table provides key financial ratios for cracked Eddie during the period 1984-1987 1987 1986 1985 1984 Current proportion 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 inscription 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 sink on Equity 0. 11 0. 31 0. 25 0. 61 Gross expediency Margin 0. 23 0. 26 0. 24 0. 22 Red Flags the Inventory overturn rate steadily declines from 1984-87, which could indicate, lost sales. Misstatements of arsenal or cost of goods interchange could be possible.It also indicates employee strikes or, in around the bend Eddies case, employees passing their reflects. In 1986 the A/R overturn rate was extremely high which is ridiculous because in that year the consumer electronics industry holla days had ended. Competition in the refreshed York argona was high. Inventory turnover evaluate had been decreasing. Extremely high A/R turnover rates are and exponent of credit and collection policies that are in addition restrictive 2. Accounting irregularities could take been free-base sooner if some audit procedures were performed. a) refutation of fund count sheets This could arouse been prevented if the attenders were law-abiding random stave counts, if the meeters randomly performed cycle count audits, or if the auditors observed an perfect physical schedule. (b) Bogus debit memos for accounts payable The auditors could have confirmed balances with the debtor. (c) Recording transshipping proceeding as retail sales witness flow of accomplishments for recording a transshipping sale. Audit the receipts of real extensive sales since transshipping sales are expi ry to be very high in ollar amount. (d) Inclusion of consigned merchandise in year-end inventorying Auditors could have observed an inbuilt year end physical inventory in all warehouses and non middling a specific one that they give out the knob 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 existence overvalued. A small evidence for why the inventory was overvalued is due to the quick decreasing prices in electronics due to invariant cleansements in technology.Electronics are out go out very fast if non s doddering upon arrival, they are always universe amend on, and so electronic stores need to have a high inventory turnover. If not, so in that respect is a chance that the inventory target become overvalued if the auditor does not stay up on the modish in electronics. An another(prenominal) change was with how Crazy Eddie was able to buy in much(prenominal) large amounts that he was able to treat 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, further it should not affect inventory. As slangn in this case, it required special attention because equivalent store sales were increased by the way drop-shipments were recorded as revenue. solely in all, if an industry is rapidly ever-changing then so should the plan for the audit. It is very important to roll in the hay how the industry is doing so it potbelly be compared to the company that is being audited. 4. The term lowballing is when the auditors sell the audit work very cheap in enounce to get very lucrative consulting deals with the client.This can jeopardize the truthfulness of the audit because the auditors whitethorn have to agree with the client on something that will affect the audit stamp in order to keep the client on their good side so they ca n keep the client as a consulting customer also. 5. Locating only if 20 of the 30 invoices requested is a major problem. I would first see if the invoices were tied to another form homogeneous 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 start to finish seeing why an invoice may get lost. If in that location is no good reason, then there is a very high likeliness that there is fraud involved. Other reading will 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 mortal who prepares the invoices or files the invoices is very low on the staff. 6.This article was written ahead the accountancy laws were changed because of problems encountered by ex-auditors working at the client, and having c onnections with the cutting auditors. This caused many problems exemplified by Enron and WorldCom. That 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 before the law was present, major fraud occurred that couldve been prevented had hiring their sexagenarian 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 fissiparous auditor would know a lot close to 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.