Crazy Eddie Auditing Case

1. Analyzing key ratios during the period 1984-1987 points out several red flags that an auditor should have noticed. The balance sheet shows huge misstatements in the accounts within the years in question. Short term investments had a zero balance until 1986, increased drastically to 21.1 and again 41.4 in 1987. Cash fell from 34 in 1985 to 3.2 in 1987. From 1984 to 1987, merchandise inventory decreased from 63.8 to 37 which is a huge red flag that should’ve been examined as well. Accrued expenses went from 16.6 in 1984 to 1.9 in 1987. Other things in the financials pointed toward a problem with inventory. The age of inventory went from 80 days in 1986 to 111.8 days in 1987. The inventory turnover decreased from 4.5 to 3.22. Accounts receivables turnover decreased from 105.2 to 53.9, while the age increased from 3.4 days to 6.7 days. All of these ratios express the problems the Crazy Eddie had with their financials.

2. A. the falsification of inventory count sheets could have been detected had the auditors performed the cycle approach, by observing a whole physical inventory or random cycle counts. B. The bogus debit memos for account payable could have been noticed had the auditors verified and cleared balances with Crazy Eddie’s debtor.

C. The recording of transshipping transactions as retail sales could’ve been noticed had the auditor paid attention to the flow of transactions for recording transshipping sale and audited the receipts of the sales that were rather large.

D. the inclusion of cosigned merchandise in the year-end inventory could have been spotted had the auditors performed a complete year-end inventory count, just as I stated above.

3. During the 1980’s the electronic industry was undergoing drastic changes all because technology at that time had room for growth. Crazy Eddie’s inventory was being over valued because of this rapid and uncertain change in the industry. The production of electronics and technology based product grew as...