Mountain State Sporting Goods case is derived from an actual fraud occurrence. The case proceeds through the five sequential steps of a fraud examination, which are to (1) validate the suspicion; (2) create a fraud hypothesis; (3) test the fraud hypothesis; (4) refine the fraud hypothesis; and (5) communicate your findings. You will test your fraud hypothesis, refine and confirm your hypothesis, and prepare a professional report communicating your results to your client.
Read the case material (Attached files). Following the presentation of the 2008 annual (compilation) report, Robert and Nathaniel engaged Mr. Dwane Peoples, a former federal prosecutor, to consider their concerns that Mr. Workman is committing fraud, i.e., stealing from the Company. Mr. Peoples subsequently engaged you as a consulting expert to assist in the evaluation and development of the case. To begin your investigation, you will proceed as follows:
1. Employing fraud theory (i.e., the fraud triangle) and professional skepticism, consider the circumstances that form a reasonable basis of the allegation(s) (i.e., suspicion of fraud).
2. Create a fraud hypothesis. Remember, a hypothesis is not a statement of fact—it is simply an educated guess about how something works or an explanation for an event.[In other words, develop a fraud hypothesis of what might have occurred based on known facts and the availabledata in this case.]
3. Test your hypothesis via financial statement and journal entry analysis. Remember, as discussed in SAS No. 99, fraudulent Journal Entries (JE) have common characteristics. Examples include:
i. JEs made to unrelated, unusual, or seldom-used accounts;
ii. JEs made by individuals typically not part of the JE process;
iii. JEs recorded at the end of the period or as post-closing entries with little or no explanation;
iv. JEs containing round numbers or a consistent ending number; and
v. JEs applied to intercompany or related parties.
4: Refine and confirm your hypothesis via fact gathering, e.g., interviews.
5: Draw your conclusion/s, and communicate your results in a report. This challenge includes a determination of the amount of the “misappropriation” if any and a related discussion of the specific schemes employed. Included should be a discussion of Mr. Hess’ role, duties, and responsibilities. Mr. Peoples has cautioned that your opinions need to be stated in a legally sufficient manner and must be based upon reliable facts, data, and methodology. He has advised you that your report will be used in settlement negotiations and may be subject to examination by an opposing expert.
Your fraud report (Step 5) SHOULD contain the following:
1. A complete statement of all opinions;
2. A basis and reasons for the opinions;
3. The data considered;
4. Any exhibits to be used in support of opinions