deposited them in Comptronixs disbursement checking account and recorded the

Deposited them in comptronixs disbursement checking

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deposited them in Comptronix's disbursement checking account and recorded the phony payments as debits against the bogus accounts payable and credits against the bogus receivables. This accounting scheme allowed the company to eliminate the bogus payables and receivables, while still retaining the fictitious sales and equipment on the income statement and balance sheet, respectively. Case adapted from “Auditing Cases: An Interactive Learning Approach” by Beasley, Mark S. et al (2012)
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This scheme continued more than four years, stretching from the beginning of 1989 to November 1992, when the three executives confessed to their manipulations. The SEC investigation noted that the Form 10-K filings for the years ended December 31, 1989, 1990, and 1991 were materially misstated as follows: 1989 1990 1991 Sales (in 000's) Reported Sales $42,420 $70,229 $102,026 Restated Sales 37,275 63,444 88,754 Overstatement of Sales 5,145 6,785 13,272 Percentage Overstatement 13.8% 10.7% 14.9% Net Income (in 000's) Reported Net Income $ 1,470 $ 3,028 $ 5,071 Restated Net Income (3,524) (3,647) ( 3,225) Overstatement of Net Income 4,994 6,675 8,296 Earnings Per Share (EPS) Reported EPS $ .19 $ .35 $ .51 Restated EPS (loss) (.47) (.43) (.34) Overstatement of EPS .66 .78 .85 Property, Plant,  Equipment (in 000's) Reported PP&E $18,804 $26,627 $ 38,720 Restated Sales 13,856 15,846 20,303 Overstatement of PP&E 4,948 10,781 18,417 Percentage Overstatement 35.7% 68.0% 90.7% Stockholders' Equity (in 000's) Reported Stockholders' Equity $19,145 $22,237 $ 39,676 Restated Stockholders' Equity 14,151 10,568 18,778 Overstatement of Stockholders' Equity 4,994 11,669 20,898 Percentage Overstatement 35.3% 110.4% 111.3% The executives' fraud scheme helped the company avoid reporting net losses in each of the three years, with the amount of the fraud increasing in each of the three years affected. 5 The fraud scheme also inflated the balance sheet by overstating property, plant, and equipment and stockholders' equity. By the end of 1991, property, plant, and equipment was overstated by more than 90%, with stockholders' equity overstated by 111%. THE COMPANY'S INTERNAL CONTROLS 6 The three executives were able to perpetrate the fraud by bypassing the existing accounting system. They avoided making the standard entries in the sales and purchases journals as required by the existing internal control, and recorded the fictitious entries manually. Other employees were excluded from the manipulations to minimize the likelihood of the fraud being discovered. According to the SEC's summary of the investigation, Comptronix employees normally created a fairly extensive paper trail for equipment purchases, including purchase orders and receiving reports. However, none of these documents were created for the bogus purchases. Approval for cash disbursements was typically granted once the related purchase order, receiving report, and vendor invoice were matched. Unfortunately, Mr. Shifflett or Mr. Medlin could approve payments based solely Case adapted from “Auditing Cases: An Interactive Learning Approach” by Beasley, Mark S. et al (2012)
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on an invoice. As a result, the fraud team was able to bypass internal controls over cash disbursements.
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