Auditing Practice
Response to the following problem:
A few years ago, the owners of an electronics wholesale company committed massive fraud by overstating revenues on the financial statements. They recorded three large fictitious sales near the end of the year to the retailers Silo, Circuit City, and Wal-Mart. The three transactions overstated revenues, receivables, and income by nearly $20 million. As part of the audit procedures, the external auditors sent requests for confirmation to the three stores to ensure that they did, in fact, owe the electronics company $20 million. In the meantime, the owners of the electronics company rented mailboxes in the cities where the three "customers" were headquartered, using names very similar to those of the three "customers." The requests for confirmation were sent to the mailboxes. The owners completed the confirmations and sent them back to the auditors, confirming the $20 million in receivables.
With respect to the fraud, answer the following two questions:
1. What journal entries would the fraud perpetrators have entered into the financial records to overstate revenues?
2. Should the external auditors be held liable for not catching the fraud?