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1 Compute key ratios for period 1984-1987 1984198519861987 Current93156140241 AR turnover5274981168325 Inventory turnover4583932525 Debt-to-equity49175198216 Efficiency37520820712 GM22242623 Return on assets2119206 Red Flags The Inventory turnover rate steadily declines from 1984-87 which could indicate lost sales Misstatements of inventory or cost of goods sold could be possible It also indicates employee strikes or in Crazy Eddies case employees leaving their jobs In 1986 the AR turnover rate was extremely high which is unusual because in that year the consumer electronics industry boom days had ended Competition in the New York area was high Inventory turnover rates had been decreasing How was Crazy Eddie receiving all this money if sales were down Extremely high AR turnover rates are and indicator of credit and collection policies that are too restrictive 2 aFalsification of inventory count sheets reperformance A corrective internal control measure to establish existence includes tracing backward items in the inventory to vendors invoices to the receiving reports and paid checks bBogus debit memos for accounts payable confirmation Confirm notes payable with banks and creditors then trace information in the confirmation replies to the general ledger c Recording of transshipping transactions as retail sales Observation View recorded sales from authorized shipping and approve customer orders and send monthly statements to customers Segregate duties between handling cash and record keeping and independent reconciliation of bank accounts This provides separate independent verification of the cash receipts and enhances proper application of such receipts to the appropriate accounts dInclusion of consigned merchandise in year-end inventory documentation Use of an adequate chart of accounts and internal verification of classification will assist in proper classification Also tracing backwards from items in the inventory to vendors invoices to the recording reports and paid checks 3 Understanding the clients industry is very important An auditor has to know the unique accounting requirements associated with that industry Understanding changes in the industry can
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