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PRACTICAL ERROR ANALYSIS FOR FINANCIAL STATEMENTS

 PRACTICAL ERROR ANALYSIS FOR FINANCIAL STATEMENTS

 In practice, draft financial statements are submitted by subordinates to their managers, these draft financial statements may be checked the following steps to identify errors or sometime fraud:

  • Comparative figures from previous periods
  • Unusual change in amount
  • New type of accounts
  • Relevant ratios analysis
  • Analytical procedures etc.

Let practice with the following example:

Top Trading Group Co.,Ltd is merchandising company, and company has two major products. The following comparative income statements are here.

Currently financial statements are unreliable, so old financial manager resigned for his position. You are new financial manager for Top Trading Group Co.,Ltd, and your accountants prepare financial statements to review, but you suspect that financial statements may have errors or frauds during review.

Top Trading Group Co.,Ltd
Comparative Income Statement
For 2015
 November December
 Sale:
Sale from Product 1 ………………………..       200,000          220,000
Sale from Product 2 ……………………….       100,000          110,000
 Sale from Other Products …………………       160,000          176,000
Total Sale ……………………………       460,000          506,000
 Cost of Goods Sold:
Product 1-COGS …………………………………….       140,000          151,800
 Product 2-COGS ………………………………….         80,000            99,000
 Other Products-COGS …………………………..       144,000          123,200
 Total COGS ………………………………       364,000          374,000
 Gross Profit ……………………………         96,000          132,000
 Other Income – Rental Income ……           2,000              3,000
 Total Expense:
Advertising ………………………………………           4,000              4,400
Salary ………………………………………………         10,000              9,000
Office supply ……………………………………              400                 600
Electricity …………………………………………..              500              2,000
Water supply………………………………………              300                 350
Rental ……………………………………………         14,000            18,000
Telephone and Internet……………………              800                 880
Depreciation………………………………           1,200               1,400
Interest expense…………………………  1,400              1,600
Other expense…………………………              740                 814
Total Expense………………………..         33,340            39,044
Net Income/(loss) …………………         64,660            95,956

During period, company bought fixed assets more.

 Required:

According to your professional judgment, identify possible frauds or errors for comparative income statements if any with reasonable explanation for any suspicion.

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