Question

As the engagement Senior, you are responsible for completing the audit of the revenue cycle for Best City, a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services.

Best City (BC) is headquartered in Richmond, VA with over 450 retail outlets across the Eastern and Midwestern United States. The Company operates retail stores and successful websites under the brand names Best City and BC (www.BestCity.com and www.BC.com). Total sales for the fiscal year ending 12/31/16 were $5.4 billion; $4.3 billion were generated by its retail stores, while $1.1 billion were generated by its e-commerce websites.

Unfortunately, as part of year-end cut-off testing, you notice a few potential “red flags” for fraud within some of the website sales transactions that you believe should be reported to the audit manager and partner.

REQUIRED: Please briefly discuss any “red flags” for fraud within the following documents (including the type of fraud scheme suggested by each “red flag”).

NOTE: Assume no sales tax is charged for online sales.

Best City, Inc. 8945 Main Street	Uniform Bill of Lading (Domestic)	Shipper No. 315AD	Date: 12/29/2016	Document No. 264889
Richmond, VA	FOB Destination
23126	TO: Peter Venable	Vehicle #7	Carrier Name (2 day deliv.)	Old Dominion
	264 Mason Street; Columbia, SC 29201
Quantity Shipped 2	Phillips 25 inch LCD Monitor	Weight    6.2 lbs	Rate       $1.53 per lb	Charge $9.49
1	HP EliteBook 1040 Laptop	15.6 lbs	$1.53 per lb	$23.87
				Total $33.36

Best City, Inc. 8945 Main Street	Uniform Bill of Lading (Domestic)	Shipper No. 389RB	Date: 12/29/2016	Document No. 264891
Richmond, VA	FOB Destination
23126	TO: Chris Perry	Vehicle #8	Carrier Name (2 day deliv.)	Old Dominion
	174 Salem Way; Fairfax, VA 22031
Quantity Shipped                   1	HP OfficeJet Pro 8720 Printer	Weight     5.3 lbs	Rate       $1.52 per lb	Charge $8.06
				Total $8.06

Best City, Inc. 8945 Main Street	Uniform Bill of Lading (Domestic)	Shipper No. 392RB	Date: 12/30/2016	Document No. 264893
Richmond, VA	FOB Shipping Point
23126	TO: Sylvia Creel	Vehicle #9	Carrier Name (2 day deliv.)	Old Dominion
	7387 Tristram Drive; Pfafftown, NC 27040
Quantity Shipped                   2	Dell Inspiron 17.3 inch Laptop	Weight       9 lbs	Rate       $1.51 per lb	Charge $13.59
1	55 inch LG TV	34 lbs	$1.51 per lb	$51.34
				Total $64.93

                                                                                                                          

Best City, Inc. 8945 Main Street	Uniform Bill of Lading (Domestic)	Shipper No. 318AD	Date: 1/5/2017	Document No. 264921
Richmond, VA	FOB Destination
23126	TO: Scott Ziegler	Vehicle #6	Carrier Name (2 day deliv.)	Old Dominion
	381 Amazon Way; Athens, GA 41040
Quantity Shipped 1	MacBook Pro 15.4 inch	Weight    13 lbs	Rate       $1.55 per lb	Charge $20.15
1	65 inch Sony TV	43 lbs	$1.55 per lb	$66.65
1	Garmin DriveSmart 61 LMT	1.4 lbs	$1.55 per lb	$2.17
1	HP OfficeJet Pro 8710	5.2 lbs	$1.55 per lb	$8.06
				Total $97.03

Best City, Inc. 8945 Main Street	Charge Sales Invoice (Domestic)	Credit Terms n/30	Date: 12/31/2016	Document No. 318519
Richmond, VA
23126	Customer ID: VENAB0012			Bill of Lading
	Name: Peter Venable			No. 264889
Quantity Shipped                       2	Phillips 25 inch LCD Monitor	Unit       Price       371.00	Discounts 0.00	Extension $742.00
1	HP EliteBook 1040 Laptop	1,239.00	0.00	$1,239.00
				Total $1,981.00

Best City, Inc. 8945 Main Street	Charge Sales Invoice (Domestic)	Credit Terms n/30	Date: 12/31/2016	Document No. 318522
Richmond, VA
23126	Customer ID: PERRY1433			Bill of Lading
	Name: Chris Perry			No. 264891
Quantity Shipped   1	HP OfficeJet Pro 8720 Printer	Unit Price   285.00	Discounts        0.00	Extension     $285.00
				Total $285.00

Best City, Inc. 8945 Main Street	Charge Sales Invoice (Domestic)	Credit Terms n/60	Date: 12/31/2016	Document No. 318548
Richmond, VA
23126	Customer ID: CREEL7291			Bill of Lading
	Name: Sylvia Creel			No. 264893
Quantity Shipped   2	Dell Inspiron 17.3 inch Laptop	Unit Price   1,324.00	Unit Discount      264.80	Extension     $2,118.40
1	55 inch LG TV	862.00	172.40	$689.60
				Total $2,808.00

Best City, Inc. 8945 Main Street	Charge Sales Invoice (Domestic)	Credit Terms n/60	Date: 12/31/2016	Document No. 318525
Richmond, VA
23126	Customer ID: ZIEGL0005			Bill of Lading
	Name: Scott Ziegler
Quantity Shipped                       1	Macbook Pro 15.4 inch	Unit       Price       1,460.00	Discounts 0.00	Extension $1,460.00
1	65 inch Sony TV	1,980.00	0.00	$1,980.00
1	Garmin DriveStart 61 LMT	212.00	0.00	$212.00
1	HP OfficeJet Pro 8710	147.00	0.00	$147.00
				Total $3,799.00

Answer 1

Issue : From the above facts of the case, we note that there have occured many errors of cutoff at the end of accounting period.

Explanation :

1.Recognising revenue principles always depend on various circumstances an organisation passes through , although it also depends on laws. As per the standard, revenue is recognised when the enterprise has transferred significant risk & rewards associated with ownership of goods to the buyer. It may sometimes happen that the sales are booked first through invoices without following a proper standard for their recognition. This mainly happens at the end of the year, reason being a hike in the revenue. Such practices may misstate the financials. These are known as improper cutoff procedures.

2.Here, FOB sales are made. When goods are shipped FOB Destination, ownership transfers when the goods reach the buyer's place. When goods are shipped FOB shipping point, ownership transfers when goods depart seller's port place.

3.The auditor should keep all these aspects in mind & do select a set of samples to check whether proper norms were followed. In case, when sampling of these procedures is done, & he is of the view that high chances of errors exist if entire population is considered, he must perform additional audit procedures in order to obtain sufficient appropriate audit evidence to clear all doubts.

4. In the first invoice, customer id : VENAB0012, we note that goods are shipped on 12/29/2016 FOB destination and delivery time being 2 days, the sales are correctly recognised on 12/31/2016.

5. In the second invoice, customer id : PERRY1433, again is the same case as of 1. Above.

6. In the third invoice, customer id : CREEL7291, goods are shipped FOB shipping point, hence ownership transfers to the buyer when good depart from the port. And billing if sales invoice done on 12/31/2016 is valid.

7. Considering the 4 th invoice, goods are shipped FOB Destination on 1/5/2017 customer id : ZIEGL0005, & sales invoice on date 12/31/2016 which is an improper practice followed. This shall be pointed out by the auditor & should be properly examined once. The sales in the above case should recognised when good reach the buyer's place i.e when risk & rewards are transferred.

Here, we should note that cut off procedures are to cgeck whether transactions & events are recorded in the correct accounting period.