Detection of Errors and Fraud. For each of the following independent events, ind

Question

Detection of Errors and Fraud. For each of the following independent events, indicate the (1) effect of the error or fraud on the financial statements and (2) what auditing procedures could have detected the misstatement resulting from error or fraud.

(a) The physical inventory count of J. Payne Enterprises, which has a December 31 year-end, was conducted no August 31 without incident. In September, the perpetual inventory was not reduced for the cost of sales.

(b) Holmes Drug Stores counted its inventory on December 31, which is its fiscal year-end. The auditors observed the count at 20 of Holmes's 86 locations. The company falsified the inventory at 20 of the locations not visited by the auditors by including ficiticious goods in the counts.

(c) Pope Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers.

(d) Peffer Electronics Inc. overstated its inventory by pricing wiring at $200 per hundred feet instead of $200 per thousand feet.

(e) Goldman Sporting Goods counted boxes of baseballs as having one dozen baseballs per box when they had only 6 per box.

Explanation / Answer

Distinguish Between Errors and Fraud

Some common errors are:

Some common Fraud occurs when:

Audit procedure to detect fraud and error covers:

Event (a) The physical inventory count of J. Payne Enterprises, which has a December 31 year-end, was conducted no August 31 without incident. In September, the perpetual inventory was not reduced for the cost of sales.

Effect on financial statement – It is an error by not reducing for the cost of sales hence Overstatement of Inventory and Profit by amount of “Reduction for Cost of Sales”.

Audit procedure to detect misstatement - Should obtain sufficient appropriate audit evidence by designing and implementing appropriate responses. Further auditor can report such misstatement.

Event (b) Holmes Drug Stores counted its inventory on December 31, which is its fiscal year-end. The auditors observed the count at 20 of Holmes's 86 locations. The company falsified the inventory at 20 of the locations not visited by the auditors by including fictitious goods in the counts.

Effect on financial statement – It is Fraud by overstatement of Inventory and Profit by amount of “fictitious goods in the counts”.

Audit procedure to detect misstatement – Auditor should expands the scope of auditing procedure by conducting count at all 86 locations instead of only 20 locations. As well as Auditor should report such fraud misstatement in its audit report.

Event (c) Pope Automotive inadvertently included in its inventory automobiles that it was holding on consignment for other dealers.

Effect on financial statement – it is an error By inadvertently inclusion in Inventory of holding on consignment for other dealers amounts to Overstatement of Inventory and Profit by amount of “consignment stock”.

Audit procedure to detect misstatement – Should obtain sufficient appropriate audit evidence by designing and implementing appropriate responses.

Event (d) Peffer Electronics Inc. overstated its inventory by pricing wiring at $200 per hundred feet instead of $200 per thousand feet.

Effect on financial statement – It is a fraud by change in pricing unit of Inventory which amounts to Overstatement of Inventory and Profit by amount of “excess valuation of inventory”.

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