Apollo Shoes Fraud Case Study

Being an investigator to Apollo Shoes, the financial statement fraud scheme likely to be present is dependent on the nature of the company. Statement on Auditing Standards No. 99 (“SAS 99”) requires to focus on two broad areas of fraud:
(i) fraudulent financial reporting and
(ii) misappropriation of assets
The siphoning of funds can occur in the income statement and capital, based on the corporate governance policies, these two areas are important where financial fraud schemes can be present. Corporate governance include policies that are framed to secure the corporation goals. It include financial goals and shareholders interest also.
The account receivable of the Apollo Shoes is increasing so rapidly might be the corporation has changed the credit terms, providing

more relaxation to the customer for payment, so that the sales increases. The receivable of the Apollo Shoes has almost tripled, but the same cannot be justified by the earnings of the company. This results in fraudulent activity as earning might be overstated and cost understated.
While investigation following techniques for investigation of revenue recognition should be done:
a) Substantive procedures to be performed to detect any fraud occurred.

b) Substantive testing should be performed to determine whether the existing scheme is followed by the corporation.
c) Review contracts invoices and deliveries
d) Confirmation to be sent, to ensure the existence if the account receivables.
Further the following are general indicator of the premature recognition of the revenue:
a) Unexplained change in recognition policies;
b) Unexplained improvements in gross margin;
c) Increase in ales has no correspondence increase in cash.
d) The reported account receivable and revenue seems to be increasing rapidly.
e) Unusual sales transaction just before the period end.
f) Large amounts of returns or credits after the close of a period
g) Increased in revenue with no corresponding increase in cost.

The analytical procedures is yet another way to detect the fraud. Through analytical procedures the relationship between different figures is develop that support the increase or decrease effect on the balance sheet and the income statement. The following procedures to be performed:

a) Comparing the current period figures with the corresponding figures and justify the increase or

decrease.
b) Horizontal and vertical analysis is done
c) Review cash flow statement to ensure that cash is collected in proportion to revenue stated.
d) Sales activity to be reviewed and any unusual transaction or trend noted to be justified.
e) Ratios should be done to ensure the consistence between various figures reported. The following ratio analysis to be done:
 Increases in Net Profit Margin (Net Income/Total Sales);
 Increases in Gross Profit Margin (Gross Profit/Net Sales);
 Increases in the Current Ratio (Current Assets/Current Liabilities);
 Increases in the Quick ratio (Cash and Receivables and Marketable Securities/Current Liabilities);
 Increases in the Accounts Receivable Turnover (Net Sales/A/R);
 Increases to Days Sales Outstanding (A/R Turnover/365);
 Increases in Sales Return Percentages (Sales Returns/Total Sales);
 Increase in Asset Turnover (Total Sales/Average Total Assets);
 Increases in Working Capital Turnover (Sales/Average Working Capital);
 Decrease in A/R Allowance as a % of A/R (Allowance/Total A/R)