Question

Attachment A

Amana Ltd was facing its first loss since listing five years ago and the chairperson of the board of directors/CEO was not about to let that happen. His bonus was tied to reported earnings. He owes shares in the company and knows the psychological impact of a first-time loss will hit his company’s share price. He asked staff who were also affected by the bonus rules to turn the loss to a small profit by the following methods:

Create fictitious inventory by adding false count sheets to the inventory count;

Bring sales for the first 10 days of the subsequent year forward;

Postpone the recognition of the expenses associated with suppliers’ invoices until the subsequent period; and

Create false claims for credit on goods returned and volume discounts that had been supposedly agreed to by suppliers.

Required

Bonus plans and employee share ownership are generally considered to be features that align the incentives of managers with those of shareholders. Is this the case for Amana Ltd?

What is the accounting impact of each of the methods listed above? For each method, identify the major account balance/class of transaction and assertion at risk of misstatement.

For each method, list two audit procedures or tests that would detect these attempts to commit fraud.

Answer 1