Question

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

Required Bonus plans and employee share ownership are generally considered to be features that align the incentives of managers with those of shareholders. But in this case of Amana Ltd., the directors/ CEO of the company are adopting manipiulative methods to increase the book profits thus increasing their bonus pay.

Method used.	Accounting Impact	Account balance at Risk of misstatement	Audit procedure to detect fraud
Create Fititious Inventory	Net Profit will increase	Closing Stock & Net Profit	1. Audior should be present at the time of Inventory taking or Stock count at year end and ensure fair means adopted for inventory valuation. 2. Check for any changes in method of valuing inventory. If there is a change, ensure that it's impact on profit is adequately disclosed as per applicable financial reporting requirements.
Bring Sales of first 10 days of next year to this year.	Net Profit will increase	Sales Debtors	1. Sctrutinse the year end sales. Verify them by supporting Delivery documents of goods. 2. Request external confirmation of account balance from customers.
Postpone recongition of expenses associated with suppliers’ invoices until the subsequent period	Expenses will reduce thus increasing Net Profit	Expenses and Creditors	1. Vouching. Check the vouchers corresponding to expenses recorded at year end and ensure that they are recorded in the period when they are incurred. 2.Comparing expenses of previous year can also give a subtle hint that some of the expenses are not recorded.
Create false claims for credit on goods returned and volume discounts that had been supposedly agreed to by suppliers	Creditors will reduce thus increasing Net Profit	Creditors & Net Profit	1. Verify the Credit Notes. Check goods are actually returned or not through proofs of delivery. Cross- check from entry outwards registers and internal correspondence of the company. 2. Check correspondence received from suppliers regarding volumne discounts, if any. External confirmation can also be sought for from the suppliers regarding year end account balances.