Gughtie's Food Case Essay
Catherine Wowk
Doughtie’s Food Case
1. Gravin’s low inventory turnover rate in comparison to the other divisions is a red flag to auditors for two reasons. One, any significant analytical differences between divisions should be noted as suspicious and further looked into. Two, it could be caused by fictitious inventory reports, giving the auditors reason to believe that there may be fraud present. When planning the audit they should have considered inventory a high risk account and ensured substantial testing would be done with a higher than normal level of scrutiny. The existence and occurrence assertions should have been tested. Wilson and Pollard should have performed a physical count of the inventory on a significant sample size to
check the existence of reported inventory, as opposed the quick approach they took to get out of the cold. Vouching a sample of inventory additions as well would have tested the occurrence that the reported inventory was in fact purchased and not fictitious.
2. Nashwinter provides a perfect example of all three elements of the fraud triangle. One, not only did Nashwinter have an incentive to commit fraud because of his divisions low profits but also received pressure from upper management to reach specific profit goals. Two, Nashwinter was provided with a few opportunities to commit the fraud via the addition of inventory sheets, changing online measurements, and the fact that the auditors did not wish to stay in the freezer and count the inventory themselves. Three, Nashwinter was able to rationalize his adjustment of inventory and commitment of fraud because he genuinely believed that one day his division would be making enough real profit to make up for the falsified reports.
3. The objective of observing physical inventory is to primarily test the existence of the inventory. It also provides evidence to support the accuracy, rights and obligations, and valuation assertions. There are nine key procedures an auditor should perform during a physical inventory count:
Ensure no production is scheduled during the count
Ensure there is no movement of inventory during the count
Make sure the inventory count teams are following the inventory count instructions
Ensure that inventory tags are issued sequentially to individual departments
Perform and record test counts to evaluate the accuracy of the entity’s inventory compilation
Obtain tag control information for testing the entity’s inventory compilation
Obtain cutoff information
Observe condition of the inventory for obsolete, slow moving or excess items
Inquire about goods held on consignment or on a ‘bill and hold’ basis
Doughtie’s Food Case
1. Gravin’s low inventory turnover rate in comparison to the other divisions is a red flag to auditors for two reasons. One, any significant analytical differences between divisions should be noted as suspicious and further looked into. Two, it could be caused by fictitious inventory reports, giving the auditors reason to believe that there may be fraud present. When planning the audit they should have considered inventory a high risk account and ensured substantial testing would be done with a higher than normal level of scrutiny. The existence and occurrence assertions should have been tested. Wilson and Pollard should have performed a physical count of the inventory on a significant sample size to
check the existence of reported inventory, as opposed the quick approach they took to get out of the cold. Vouching a sample of inventory additions as well would have tested the occurrence that the reported inventory was in fact purchased and not fictitious.
2. Nashwinter provides a perfect example of all three elements of the fraud triangle. One, not only did Nashwinter have an incentive to commit fraud because of his divisions low profits but also received pressure from upper management to reach specific profit goals. Two, Nashwinter was provided with a few opportunities to commit the fraud via the addition of inventory sheets, changing online measurements, and the fact that the auditors did not wish to stay in the freezer and count the inventory themselves. Three, Nashwinter was able to rationalize his adjustment of inventory and commitment of fraud because he genuinely believed that one day his division would be making enough real profit to make up for the falsified reports.
3. The objective of observing physical inventory is to primarily test the existence of the inventory. It also provides evidence to support the accuracy, rights and obligations, and valuation assertions. There are nine key procedures an auditor should perform during a physical inventory count:
Ensure no production is scheduled during the count
Ensure there is no movement of inventory during the count
Make sure the inventory count teams are following the inventory count instructions
Ensure that inventory tags are issued sequentially to individual departments
Perform and record test counts to evaluate the accuracy of the entity’s inventory compilation
Obtain tag control information for testing the entity’s inventory compilation
Obtain cutoff information
Observe condition of the inventory for obsolete, slow moving or excess items
Inquire about goods held on consignment or on a ‘bill and hold’ basis