Question

3,62 Using the Computer to Discover Intentional Financial Misstatements in Transactions and Account Balances. AMI International is a large office products company. Headquarters management imposed pressure on operating division managers to meet profit forecasts. The division managers met these profit goals using several accounting manipulations involving the record-keeping system that maintained all transactions and account balances on computer files. Employees who operated the computer accounting system were aware of the modifications of policy the managers ordered to accomplish the financial statement manipulations. The management and employees carried out these activities: 1. Deferred inventory write-downs for obsolete and damaged goods 2. Kept open the sales entry system after the quarterly and annual cutof dates, recording sales of goods shipped after the cutoff dates. Recorded as sales transactions that had been coded as leases of office equipment 4. Recorded shipments to branch offices as sales. 5. Postponed recording vendors invoices for parts and services until later, but the actual invoice date was faithfully entered according to accounting policy Required: Describe one or more procedures that could be performed with CAATS to detect signs of each of these transaction manipulations. Limit your answer to the actual work accomplished by the computer software

Answer 1

1. One of the tools that can be used for identifying inventory manipulation is comparing the inventory turnover ratios from previous years along with comparing for obsolete and damaged inventory from last years. Previous year accounting records can be used for such comparison.

2. For identifying post dated sales and its manipulation one of the techniques which can be used is checking the bill numbers along with the availability of inventory. Profit margins along with discount given also needs to be checked for identifying any type of manipulation in sale amount.

3. Wrong accounting of other income in the sale amount can be identified by checking the sequence of bill number along with comparing the same with previous year data. Wrong recording of lease of office equipment can also be identified by having a check on the lease income of previous years along with checking the lease agreement.

4. Recording of transfer of goods as sales can be identified by checking the sale order that is received by the company. Apart, another way to identify incorrect sale is to check the accounts of the branch and to payment mode of the sale amount recorded.

5. Late posting of invoices can be easily identified by comparing the inventory amount along with checking the gross sale percentage and net sale percentage. Comparing COGS percentage can easily reflect unaccounted purchase of raw materials.