Question

Alpha Technologies designs, manufactures and markets an extensive line of PC cards. The company sells these cards primarily to original equipment manufacturers (OEMs) for industrial and commercial applications in a market with intense competition. In fact, many OEM companies ran into financial difficulty in 2016 because of intense competition. The following selected data is taken from the company’s financial statements:

Partial Consolidated Balance Sheet (unaudited)   December 31, 2016        December 31, 2015

Current Assets

Cash & Cash Equivalents                                                   $6,181,520                      $970,446

Available-for-Sale Securities                                              $4,932,763

Accounts Receivable (net of Allowance for

     Doubtful Accounts of $148,300 and $139,200

     At December 31, 2016 and 2015, respectively)     $12,592,231                    $3,932,170

Inventories                                                                       $18,229,317                    $8,609,492

Other Current Assets                                                       $18,229,317                    $8,609,492

Total Current Assets                                                        $60,165,148                   $22,121,600

Partial Income Statement (unaudited)          Year                      Year                      Year

                                                                          Ended                    Ended                    Ended

                                                                     12/31/2016            12/31/2015            12/31/2014

Sales                                                           $37,847,681          $12,445,015           $8,213,236

Cost of Goods Sold                                    $15,895,741          $6,832,927         $4,523,186

Gross Margin                                             $21,951,940          $5,612,088         $3,690,050

Part I:

Determine the red flags that exist in these financial statements. Describe the scenarios that might contain these symptoms.

Part II:

Based upon the red flags and the scenarios identified above, determine the nature and extent of possible financial statement fraud, paying close attention to sales, cost of goods sold and the allowance for doubtful accounts receivable.

Answer 1

1. Increase in Cash Flow :- 11.45 times (1,11,14,283/ 970,466), then previous year.

Thus it increase holding cost and opportunity cost of investment and earning. This can be like that company have large debts which are encash and unused. Risk of theft, forgery, etc are arise and it's safety also cause penny.

2. Increase in Accounts Receivable by 3.2 times then previous year. With increase in sales, there is also increase receivable from customer. Now, company have to invest 3 times more in collecting money. As little change in doubtful assets, it suspicious that company receivable would aren't change despite 3 times increase in sale.

3. Average Inventory :- ((18229317+8609492)/2) = 1,34,19,405.

Inventory Turnover :- 1.18 times (15895741/13419405)

While Accounts Receivable is (37847681/(12592231+3932170) = 4.58 times

4. Cost of Goods Sold = 15,895,741, while actual Purchase in year is

Purchase = 15895741 + 18229317 - 8609492

= 25,515,566.00

Above, picture seems to be window dressing has 2016 year has stated is tough competition year, despite that company achieve times higher target, with reduce cost of goods sold and even making higher cash and lower doubtful receivable.