Fraud Examination Casebook with Documents

CHAPTER 1Case 1: Fraudulent Financial Statements

1-1 LARSEN CONVENIENCE STORE: USING ANALYTICAL PROCEDURES IN DETECTING FINANCIAL STATEMENT FRAUD

Learning Objective

After completing and discussing this case, you should be able to:

1. Review and analyze financial statement information relating to a company's balance sheet and income statement accounts using horizontal and vertical analysis method.
2. Identify potential fraudulent financial accounts for closer scrutiny.
3. Understand one method used to estimate the loss from the destruction of the out‐of‐sight (destroyed) inventory (cost of goods sold as a percent of gross receipts).
4. Be able to use one ratio (days sales of inventory) to detect potentially misstated inventory balances.

 

HISTORY BEHIND THE FRAUD CASE:

In one of the author's fraud cases, an incendiary device destroyed a franchised grocery store at 3:00 a.m. on December 31. The Special Agent in Charge (SAC) of the investigation wanted the case agent to close the case because the store experienced its best year ever. Why would the owner destroy a profitable business? At the time the request was made, two cause‐and‐origin teams concluded that the torches poured over 30 gallons of gasoline that caused a massive explosion, which blew the front windows several hundred feet into the parking lot, warped huge girders, and propelled a concrete wall into the street almost killing a motorist. The case agent pleaded with the author to give the financial information a second look to ...