Практический вопрос for auditors

[KPACOTA]

Question:
Assuming that you are an auditor, what types of transactions would you pay special attention to in the audit of your clients by industry? What ratio might provide warnings about possible channel stuffings?

Answer:
I would look for a sudden increase in sales and accounts receivables. A decline in this ratio may indicate that a company is getting lax in their credit standards in an attempt to boost sales or they could have a second private agreement that the customer can return the merchandise. Unfortunately, there is no way to truly detect fraud if both the customer and the vendor are in agreement on their story. An auditor’s job is to obtain reasonable assurance. If both parties have the same story, it is hard to prove collusion. The offer would have to be very attractive for any customer to risk going to jail.
I would review any contracts, maybe looking for unusual customers. I would examine the right of return policy or any buyback agreements. Also, if I felt it was warranted, I may contact some of the individual customers and ask if any side agreements had been made.
The only transactions that might make me suspicious really would be increased sales and an increase in accounts receivable over several months time.

Question:
Is there anything else I am missing?

Thank you.

[Milliardo]

Question 1

You begin the audit process by obtaining an understanding of how the industry operates, how GAAP is interpreted and applied within the industry, and what cycles are considered high-risk within the industry. For example, within the semiconductor industry, the inventory cycle is of high risk, while within the software industry, it would not be as crucial.

You then obtain an understanding of the client's business process and accounting policies, and compare them to industry norms. You then flag policies / procedures which are inconsistent with the industry, and you flag the cycles which are of high risk in the context of the industry.

After you have a clear picture of the risks, you design the testing program to address the general industry risks + specific risks identified for the client.


Question 2

You would also look for a decrease of revenue and inventory reserves as a % of gross sales, especially if the client uses "sell-in" method of revenue recognition, as opposed to a "sell-through" method. If a sell-in method is used (sales and COGS are recognized upon shipment of inventory to the distributor/retailer), the company has to record adequate reserves to account for returns and other expected consessions to distributors, such as taking back slow moving products/replacing them with stuff for free. Lower reserves coupled with growing sales => channel stuffing.