Question

900 500 900 Assume that Alpha and Omega compete in the same four-digit SIC code industry and offer comparable products and services. The following table contains their reported financial performance and condition for the last two years: Alpha Company Omega Company Balance Sheet Year 1 Year 2 Analysis Year 1 Year 2 Analysis Assets-Cash 250 480 92% 250 480 92% Assets-Accounts Receivable 250 330 32% 250 530 1129 Assets-Long-Term 500 80% 500 80% Assets 1,000 1,710 71% 1,000 1,910 91% Liabilities-Current 400 750 88% 400 750 88% Liabilities-Long-Term 200 375 889 200 375 88% Liabilities 600 1,125 88% 600 1,125 88% Stockholders' Equity 400 585 46% 400 785 Liabilities and Stockholders' Equity 1,000 1,710 71% 1,000 1,910 Income Statement Revenues 1,200 2,200 83% 1,200 2,400 100% Costs of Goods Sold 500 925 85% 500 925 85% Gross Profit 700 1,275 82% 700 1,475 111% Operating Expenses 600 1,090 82% 600 1,090 82% Operating Income 100 185 85% 100 385 285% Statement of Cash Flows Operating Income 100 185 85% 100 385 285% Depreciation * Operating Cash 25 45 80% 25 -155 -720% Operating Cash Flows 125 230 84% 125 230 84% 96% 91%

Using the financial statement data provided, complete the following assignments:

1. Describe any symptoms of fraud
2. Draw a conclusion about fraud predication and recommend next steps.

Answer 1

On our analysis of Alpha and Omega, we find a couple of symptoms of fraud in Omega Company.

Firstly it appears that fictitious sales have been recorded. There has been greater increase in revenue whereas cost of goods sold and other operating expenses have increased in line with Alpha Company. The debtors have substantially gone up and are not in line with increase in revenue. Increase in cash is also in line with Alpha Company.

Secondly negative depreciation and increase in stock holder’s equity implies that there may be some manipulation with the depreciation amount to show increased profits.

This comparison with the company in the same industry that offers comparable product and services has helped in identification of some symptoms of fraud. The company should now get further details to confirm the same. Check sale invoices, get debtors confirmation and verification of debtors. It should understand the reason for decrease in depreciation, is it related to change in policy, what policy is adopted and is the accounting treatment correct.