Growth Electronics Case

Growth Electronics Case

Problem

In this case In this case we are presented a situation of client acceptance. The major problems in this case revolve around revenue recognition, accounts receivable being in accordance with GAAP, and their practices in their offshore locations.

Solution

I would accept the client. I believe recognizing the revenue in question is acceptable. The accounts receivable is questionable and needs further review. Their business practices in their offshore locations needs to be altered.

Analysis

Accounting Risks

The yearend sale in question initially appears suspect. The timing and nature of the sale both point to possible tampering to boost earnings. However, the legal opinion shows we can assume FOB shipping point and with the contracts Growth has negotiated with their clients, this does constitute a sale.

In reviewing Growth Electronics aged uncollectible accounts schedule I find their balances to be reasonable but their percentage of collectability to be very high. A 50 percent collection rate on an account that is a full year delinquent seems overoptimistic at best. The procedure Growth is following is in accordance with GAAP but accounts receivable historic data needs to be reviewed to verify the collection percentage.

There is a slight possibility of fraud in regards to the shipment of inventory to Malaysia to be used as warranty parts and recorded as other assets. There is a lack of internal control procedures for internal transfers. It is possible these parts are obsolete inventory. This should be easy to discover with an inspection of the Malaysia facility. The controller seems to be competent and altered controls would be easy to implement.

Business Risk

There are many business risks in the computer industry. It is a fiercely competitive marketplace with new entrants coming in regularly. The need to stay as advanced as possible is very important. Growth is no longer producing the most advance drives....