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Accounting fraud indicators of a supermarket company

The audit team assigned to audit some suspicious financial reporting practices in the retail company you selected. Based on the company's operations, identify some possible red flags that may point to fraudulent financial reporting in the company.

**Accounting fraud indicators of a supermarket company**
- Provide an introduction to the company, its operations, and its financial reporting practices.
- Based on the company's financial reporting practices, use examples to explain red flags in financial reporting.
Examine the following, in addition to others, identify, in gaining an understanding of accounting fraud indicators:

- Capital structure: Use ratios to determine debt relative to equity.
- Solvency and debt servicing: Use ratios to determine the company's ability to meet its short-term financial obligations and debt servicing.
- Vertical, horizontal, and comparative analysis: Select a methodology for executing analytical procedures. Identify and analyze dramatic changes in the financial position and operations.
- Cash flow analysis: Examine the cash flow statement, available cash, purchases, sales, and earnings. For instance, judging from the cash flows, does it appear reasonable that the company made all of the reported purchases for the period? If earnings are true, what explains the low net cash flow or available cash?
- Foot notes and disclosures: Critically analyze disclosures for 1) lack of disclosures for key items such as pending litigation and provision for possible loss and 2) discrepancies between disclosures and operations.
- Internal controls: Examine compliance with the Sarbanes-Oxley Act of 2002. Identify and review internal control assessments and reporting.
- SEC filings and amendments: Examine the rate and magnitude of reporting anomalies in SEC filings. Critically analyze management discussion and analyses (MD&As) and note how prior "forward-looking" statements are realized or otherwise. Additionally, note how management addresses efficient utilization of assets and compare it with actual operations.
- Others: Use public records to identify other methods of gauging the possibility of financial reporting fraud.

Part II

Write a report discussing the control measures over financial reporting needed to prevent and detect financial reporting fraud that was recommended to the selected company. Use the financial reporting red flags that was identified to make the recommendation.

Solution Preview

Part I
Introduction:

Wal-Mart is a multinational corporation that operates retail stores in different formats that include general merchandise stores, supercenters, discount stores, apparel stores and membership warehouse clubs. The company's business operations are categorized into three business segments and this is Wal-Mart U.S, Wal-Mart internal and Sam's Club (Reuters, 2011). The retail company is involved in selling grocery items, household products, health and beauty aids, electronic products, automotive accessories, and hardware goods.

Financial reporting practices:

Wal-Mart has a finance and audit committees that are responsible for overseeing the company's financial reporting practices. The audit committee is responsible for the company's disclosure procedures and controls in its financial statements. The committee is responsible for ensuring that disclosures in company reports are in accordance with Securities and Exchange Commission regulations. Braiotta (2007) provides that Wal-Mart has maintained internal and disclosures control systems to ensure that financial reports are accurate and reliable. Wal-Mart's financial statements are prepared according to generally accepted accounting standards.

In addition to internal controls ensuring that financial statements provide a reliable basis, the controls also ensure that company assets are safeguarded against misuse. The management of the company reviews and modify internal and disclosure controls in response to changes in regulation and from the recommendation from auditors (Braiotta, 2007). One of the most important accounts in Wal-Mart is its inventory account since it makes up 69% of the company's assets. Wal-Mart uses perpetual inventory system whereby inventory balance is continuously updated with every purchase and sale made (Cost of Goods Sold, 2010). The company also practices accrual method of accounting in its financial reports. In the 2010 annual report that the company filed, it provided that the company uses last in first out the method in its inventory and that inventories are valued at lower of market or cost. Inventory contained in Wal-Mart's distribution warehouses is valued using weighted average and maintained using LIFO method. ...

Solution Summary

The following posting helps with a problem involving fraudulent financial reporting in a company.

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