Crazy Eddie Case
crazy eddiCase 1.8
Crazy Eddie, Inc.
Term A2/Spring 2013
March 19, 2013
Table of Contents
Issues…………………………………………………………………………………………...3
Facts…………………………………………………………………………………………….4
Analysis and Conclusions…………………………………………………………………….6
Conclusions…………………………………………………………………………………….9
Issues 1. Compute key ratios and other financial measures for Crazy Eddie during the period 1984-1987. Identify and briefly explain the red flags in Crazy Eddie’s financial statements that suggested the firm possess a higher-than-normal level of audit risk. 2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities perpetrated by Crazy Eddie personnel: (a) the falsification of inventory count sheets, (b) the bogus debit memos for accounts payable, (c) the recording of transshipping transactions as retail sales, and (d) the inclusion of consigned merchandise in year-end inventory. 3. The retail consumer electronics industry was undergoing rapid and dramatic changes during 1980s. Discuss how changes in an audit client’s industry should affect audit planning decisions. Relate this discussion to Crazy Eddie. 4. Explain what is implied by the term lowballing in an audit context. How can this practice potentially affect the quality of independent audit services? 5. Assume that you were a member of Crazy Eddie audit team in 1986. You were assigned to test the client’s year year-end inventory cutoff procedures. You selected 30 invoices entered in the accounting records near year-end: 15 in the few days prior to the client’s fiscal year-end. And 15 in the first few days of the New Year. Assume that client personnel were unable to locate 10 of these invoices. How should you and your superiors have responded to this situation? Explain. 6. Should companies be allowed to hire individuals who formerly served as their independent auditors? Discuss the pros and cons of this practice.
Facts * By 1987 Antar’s firm Crazy Eddie,
Crazy Eddie, Inc.
Term A2/Spring 2013
March 19, 2013
Table of Contents
Issues…………………………………………………………………………………………...3
Facts…………………………………………………………………………………………….4
Analysis and Conclusions…………………………………………………………………….6
Conclusions…………………………………………………………………………………….9
Issues 1. Compute key ratios and other financial measures for Crazy Eddie during the period 1984-1987. Identify and briefly explain the red flags in Crazy Eddie’s financial statements that suggested the firm possess a higher-than-normal level of audit risk. 2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities perpetrated by Crazy Eddie personnel: (a) the falsification of inventory count sheets, (b) the bogus debit memos for accounts payable, (c) the recording of transshipping transactions as retail sales, and (d) the inclusion of consigned merchandise in year-end inventory. 3. The retail consumer electronics industry was undergoing rapid and dramatic changes during 1980s. Discuss how changes in an audit client’s industry should affect audit planning decisions. Relate this discussion to Crazy Eddie. 4. Explain what is implied by the term lowballing in an audit context. How can this practice potentially affect the quality of independent audit services? 5. Assume that you were a member of Crazy Eddie audit team in 1986. You were assigned to test the client’s year year-end inventory cutoff procedures. You selected 30 invoices entered in the accounting records near year-end: 15 in the few days prior to the client’s fiscal year-end. And 15 in the first few days of the New Year. Assume that client personnel were unable to locate 10 of these invoices. How should you and your superiors have responded to this situation? Explain. 6. Should companies be allowed to hire individuals who formerly served as their independent auditors? Discuss the pros and cons of this practice.
Facts * By 1987 Antar’s firm Crazy Eddie,