This morning a meeting took place to discuss potentially fraudulent activity occurring within Apollo Shoes, Inc. After much discussion, the most probable fraud scheme at Apollo involves accounts receivable due to the accounts being overstated. The overstatement is significant enough to warrant additional audit testing. The potential for fraud in the accounts receivables lies in the lack of review procedures for the allowance of bad debt. There is no clear guidance in how much should be set aside for this purpose.
The atmosphere of Apollo Shoes, including Mr. Lancaster’s unwillingness to write off doubtful accounts, is a tense one at best. The company is not turning the profit and moving merchandise as expected. A shipment was sent to Mall- Warts, one of the biggest customers of Apollo Shoes, after it filed bankruptcy. A purchase order was not located for this shipment, nor was payment collected. Despite Mall-Wart stating that it cannot afford to return the shipment let alone pay the invoice, Apollo Shoes will not claim the amount due as doubtful.
The reasoning of eventually the bankruptcy will be settled, and the bill can be paid is unrealistic at best. Apollo is trying to maintain the lines of credit with its business partners, and they want to prove to investors that the company is doing well. Apollo does not wish to lose its current investors to other opportunities. The appearance of overstating its accounts is very strongly suggested upon review of the documents. The biggest red flag was that the allowance for bad debt expense dropped from 7. 7 percent to 2. 5 percent after the accounts receivable increased.
In order to prove this theory, it is necessary to collect data on the allowance of bad debt from previous years, including the percentage of debt that was uncollectable. A review of the significant accounting estimates from last year is also required. This will assess whether or not management’s assessment is biased. It was noted that one the members of Apollo’s Board of Directors, Mr. Theodore Horstmann, also serves as the minister of commerce of Anglonesia. The primary supplier of shoes for Apollo is Anglonesia Rehabilitation and Reprogramming Institute.
This could be further motive for Apollo to overstate its accounts and not wishing to write-off any other uncollectible accounts receivable. The cost of additional audit testing is a necessary expense in order to ensure that Apollo Shoes is irreproachable in the upcoming audit. The discrepancies in the accounts receivables is significant enough to warrant further investigation. After the hasty withdrawal of Smith & Smith, CPAs, Apollo Shoes cannot afford any further audit embarrassment. Thank you for your time. If there are any further questions please feel to contact one of us. Have a good day.