Mga614 Write Up for Leslie Fay Companies PDF

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Group write up of presentation on the Leslie Fay Companies submitted to Professor Ampadu ...

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Leslie Fay Inc. Write-Up MGA 614 – X:XX Group XX – OMITTED AUTHORS

Background Leslie Fay was founded by Fred Pomerantz in 1947. The company designed and sold moderately priced but stylish conservative dresses for women age 30 through 55. The company continued to grow and was sold in department stores in major cities across the country during the decades following World War 2. The company reported high earnings despite low earnings being reported across the industry. Leslie Fay, Inc. came crashing down in 1993 when there was a discovery of accounting improprieties and ultimately became bankrupted. Eventually the company emerged from bankruptcy and was acquired by Dillards. Major Schemes The accounting fraud overstated the company’s profit by approximately $80 million from 1990 to 1992. To do this the company did things like inflate quantity of dresses manufactured by using forged inventory tags. The company also failed to accrue period-ending expenses and liabilities, failed to write-off uncollectible receivables, and ignored discounts on outstanding receivables granted. In addition, Leslie Fay had bogus in-transit inventory and prerecorded orders received to inflate inventory and revenue. Audit Analysis Revenue Recognition Assertion: Cut-Off Evidence: Documentary Recommended Procedures: The auditors should have vouched from the sales journal to the sales invoices and shipping documents. If the dates that the goods were shipped was later than the date of the sale in the ledger, the revenue recognition principle was violated. The auditors should have done more cut-off testing to ensure sales were recorded in the proper period. Inventory Assertions: Existence and Valuation Evidence: Physical Observation and Documentary Recommended Procedures: To test for existence, we recommend that the auditors perform more detailed inventory observation. They should open the boxes of inventory and ensure that the number of items in the boxes match the inventory tags. The auditors also should increase their sample size when vouching intransit inventory from the sales journal to sales invoices and bills of lading. When assessing valuation of inventory, the auditors should have performed more in-depth tests to check for obsolescence because this is a high risk area in the fashion industry. To test for obsolescence, the auditors should bring in a specialist to determine if the inventory should still be valued at its full price. Receivables Assertion: Valuation Evidence: Confirmation letters. Recommended Procedures: We recommend that auditors reperform the aging schedule to find older accounts receivable balances. Then, the auditor should send confirmation letters with blank numbers to the related accounts receivable customers. The auditors should also assess the write-off policy and ensure

that the company is properly recording allowances of doubtful accounts. The confirmation for accounts receivable is required by the PCAOB when accounts receivable is material to the organization or the assessed inherent and control risk is very high within the organization. Liabilities and Expenses Assertion: Completeness Evidence: Auditor’s determination Recommended Procedures: Obtain physical contracts with supplies and look at terms of the agreement, ask client for record of cash disbursement journal after year end and vouch to invoices, statements, receipts, contacts to make sure that no entries has been omitted Why Did Audit Fail? We believe the audit failed because BDO Seidman didn’t plan the audit sufficiently and appropriately. During the late 1980s and early 1990s, the economy was slowing down yet Leslie Fay reported impressive sales and earnings. Each year BDO Seidman continued to issue a clean opinion and accept the engagement without full consideration of these differences. In addition, the fashion industry is inherently risky because of the changing trends. During the late 1980s, women were looking towards casual apparel like t-shirts and denim instead of dresses. With proper consideration the auditors should have assessed inherent risk to be high. In assessing control risk, the auditors should’ve consider the fact that John Pomerantz continued operating the company old fashionably like his father. He didn’t do market tests to gauge women’s changes in taste of clothes, and was slow to adopt technology in the company’s key internal control functions. BDO Seidman should have considered these warning signs in assessing control risk and making sure it is also assessed as high to do sufficient substantive testing. Similar Cases Our case does have some parallels to the other cases we have read thus far. The major similarity is the description of the company executives. Each of the executives responsible for the frauds have similar personalities. These executives led a lavish lifestyle that they were unwilling to give up, which would suggest a pressure to commit fraud. The domineering personalities were another major similarity. This is an important red flag to note when assessing management’s integrity. As we learned in these cases, domineering executives are more likely to commit fraud and put pressure on their subordinates to assist with the fraud or to cover the fraud when it has been discovered. Conclusion The auditors should have increased sample sizes after assessing risk to be very high with this particular client. They also should have followed up with unusual numbers found during analytical procedures. While the auditors performed these tasks at a basic level, increasing the details could have led them to uncover the fraud....