Question

Barry Greenstem, a partner at Homegrown Gardens, LLP has hired you, a fraud examiner, to do a preliminary investigation of his concerns that Betty Stevenson is accepting kickbacks. The red flags he identified are: 1) Homegrown pays higher prices to the wholesaler Monromio Nursery than other retailers do and 2) Betty appears to be living beyond her means. Barry wants you to do a preliminary investigation and to write a memo to him and the other partners. You determine that you need to do a net worth analysis as a first step in your preliminary investigation (the data you need is on page 265). Your memo should provide the partners with a summary of the situation, your initial analysis/findings, the possible options the partners have if they want you to continue your investigation, and what next steps you recommend. Remember to follow the Memo guidelines.

Data from page 265 to complete net worth analysis.

CASE STUDY 4 YLAR BEFORE LAST LAST YLAR THIS YEAR Assets: $70,000 $70,000 $200,000 Personal residence Automobiles 15,000 45,000 30,000 Houseboat 45,000 30,000 12,000 12,000 ATVs Liabilities: Mortgage balance Auto loan 35,000 30,500 100,000 2,500 Loan on 15,000 11,000 houseboat Income: 25,000 25,500 26,000 35,000 36,000 37,000 4,500 4,500 Betty's salary Mike's salary Expenses: Mortgage payments Auto payments Houseboat 13,000 1,800 1,800 2,400 2,400 payments Other living 15,000 17,000 15,000 expenses

Answer 1

The Net Worth Method looks at the difference between a total assets less total liabilities on any two given dates and then consider the Expenses and Income . If the evidence collected can establish that a person’s net worth increased more than the receipts received by a person in the form of money or property, less expenses, then this excess would be additional taxable income to that person. Also considered is the spending for living expenses, taxes, etc.

Following are initial Findins and gives a preminilary idea of concept to the Partners through  which they can decide upon :

Particulars	Year before Last Year	Last Year	This Year
Personal Residence	$         70,000	$        70,000	$        200,000
Automobiles	$         15,000	$        45,000	$          45,000
Houseboats		$        30,000	$          30,000
ATVs		$        12,000	$          12,000
Mortgage Balance	$      (35,000)	$     (30,500)	$        100,000
Auto Loan	$         (2,500)
Loan on boat		$     (15,000)	$        (11,000)
Net Worth	$         47,500	$     111,500	$        376,000

Applying the above amounts to a commonly used Net Worth Method formula yields the following:

Particulars	Amount	Amount
Ending Net Worth	$     111,500	$        376,000
Beginning Net Worth	$     (47,500)	$     (111,500)
Increase in Net Worth	$        64,000	$        264,500
Living Expenses & Other Expenses (add)	$25700	$32200
Known Income (less)	-$61500	-$63000
Expenditure in Excess of Known sources of fund	$        28,200	$        233,700

Analysising the above , it says Target increase in Net worth $ 64,000 is $28200 in excess of their known earned income , and similarily increase in Net worth in current year $ 264,500 is $ 233,700 in excess of their Known earned Income

We as an Investigation team recommend to go ahead and to find the unknown sources which has let increase in Net Worth .