Retro Technologies designs, manufactures and markets an extensive line of PC car

Question

Retro 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

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

2.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.

Explanation / Answer

Red flag exist in these statements are Other Current Assets, Accounts Receivable, Inventories, Cost of goods sold and Sales. To examine the red flag scenario in the financial statements we have to calculate the ratios to confirm the nature and extent possible financial statement fraud.

A number of accounts, which permit a subjective estimation, are more difficult to audit and thus are prone to fraudulent falsification. Accounts Receivable, inventory and sales fall into this category.

Recording sales before they are earned may show up as additional accounts receivable. Sometimes increase in the doubtful debts shown even though they are receivable.

    

In the problem given the inventories and Other current assets are the same. It indicates the books are cooked and having fradulant red flag.

Partial Consolidated Balance Sheet(unaudited) 31-Dec-16 31-Dec-15 Current Assets Cash & Cash Equivalents $ 6,181,520 $ 970,446 Available for sale Securities $ 4,932,763 Accouts Receivable $ 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 Statements(unaudited) Year ended Year ended Year 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

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