DISCUSSION PoFAuditing.docx - USE THIS AS A BASE GUIDE DO...

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USE THIS AS A BASE GUIDE, DO NOT SUBMIT WORD FOR WORD US Foodservice & Vendor Payments Auditing procedures require that inventory be reported at its cost or its net realizable value whichever is lower. The costing of inventory can be complex, especially for retailers and large wholesalers. Different industries have different practices regarding inventory purchases and the auditor needs to understand the relevant accounting procedures that apply to the particular industry when conducting the audit. One example is the requirement that allowances received from manufacturers by wholesalers or retailers be applied as a reduction in inventory cost when the inventory is paid for. Allowances accounted for incorrectly as income prior to having been earned can be used to manipulate income as shown in the example of US Foodservice. US Foodservice, owned by Dutch supermarket operator Ahold NV, overstated its profits for 2001 and 2002 by a total of at least $500 million, through a scheme involving the booking of manufacturer’s promotional allowances or rebates. Faced with decreasing sales, the management of US Foodservice described in a conference call an "initiative" that would give those employees a chance to earn bonus money and help U.S. Foodservice meet its yearly earnings target, according to two senior managers who listened in. The new strategy announced on the conference call last fall involved ordering huge quantities of food and paper goods from manufacturers such as Sara Lee Corp., Kraft Foods Inc., Georgia-Pacific Corp. and Nestle SA, the two U.S. Foodservice managers say. The manufacturers had agreed to pay the distributor hefty rebates ranging from 8.5% to 46%, which U.S. Foodservice may have booked immediately to try to boost 2002 earnings, one manager says. Soon, unusual quantities of frozen pies, bottled water, and other items began overflowing U.S. Foodservice's warehouses. The company had to rent additional space and hire cold-storage trucks to hold it all.
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  • Fall '08
  • staff
  • Financial audit, vice president

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