Reference no: EM132451112

Response a:

• One of the ways that management could manipulate the inventory would be to take empty boxes and place them within the inventory to make it look as if there was more inventory than what there really is. If the auditors just took what they saw instead of looking through the boxes it would look like more inventory.

• A subsequent event is something that happens between the time the financial statements are complete and the time the auditors do their audit. The subsequent discovery of facts when the auditors become aware of something after they have done their report.

• If there is a subsequent discovery of facts the auditor should go back and audit the new information and make any revisions if necessary. If there is a subsequent event, the auditor should provide a little leeway or a small cushion that will take into consideration of something that might happen that will make an impact on the financial statements. They should make sure that there is a disclosure if needed to make up for those events.

Response b:

• There are many ways a dishonest client can attempt to manipulate inventory. An auditor must look at the data with a different mindset, suspecting not only how inventory fraud works, but why the client would resort to such improprieties in the first place. When analyzing a company's financial statements over time, the auditor should look for the following trends: inventory increasing faster than sales, decreasing inventory turnover, shipping costs decreasing as a percentage of inventory, inventory rising faster than total assets move up, falling cost of sales as a percentage of sales, cost of goods sold on the books not agreeing with tax returns. The obvious way to increase inventory asset value is to create various records for items that do not exist unsupported journal entries, inflated inventory count sheets, bogus shipping and receiving reports and fake purchase orders. The most reliable way to validate inventory quantity is to count it in its entirety. Even when this is done, little mistakes can allow inventory fraud to go undetected: management representatives follow the auditor and record the test counts. Thereafter, the client can add phony inventory to the items not tested. This will falsely increase the total inventory values. Auditors announce when and where they will conduct their test counts. For companies with multiple inventory locations, this advance warning permits management to conceal shortages at locations which auditors will not visit. Sometimes auditors do not take the extra step of examining packed boxes. To inflate inventory, management stacks empty boxes in the warehouse.

Respond c:

What is the difference between the subsequent events and the a subsequent discovery of facts?