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In February 1987, the U.S. Attorney for the District of New Jersey
commenced a federal grand jury investigation into the warranty billing
practices of Crazy Eddie. In September of that year, the United States
Securities and Exchange Commission initiated an investigation into alleged
violations of federal securities laws by certain Crazy Eddie officers and
employees. Eddie Antar was eventually charged with a series of crimes was
indicted.
Antar fled to Israel in February 1990, but was returned to the United States
in January 1993 to stand trial. His 1993 conviction on fraud charges was
overturned, but he eventually pleaded guilty in 1996. In 1997, Antar was
sentenced to eight years in prison and paid large fines. He was released from
prison in 1999.
Questions and Answers
1. Compute key ratios and other financial measures for Crazy Eddie
during the period 1984-1987. Identify and briefly explain the red flags
in Crazy Eddie’s financial statements that suggested the firm posed a
higher-than-normal level of audit risk.
Liquidity Ratios:
Current Ratio: 2.4062, 1.3985, 1.5626, 0.9287
Quick Ratio: 1.4044, 0.5982, 0.7680, 0.1499
Solvency Ratios:
Debt to Assets Ratio 0.6837 0.6643 0.6359 0.8298
Times Interest Earned 3.6169 30.3927 28.2877 14.9253
Long-Term Debt to Equity 2.1617 1.9786 1.7462 4.8755
Activity Ratios:
Accounts Receivable Turnover 32.5026, 116.7711 49.7515, 52.7208
Inventory Turnover Ratio: 4.98, 3.55, 1.89, 1.95
2. Identify specific audit procedures that might have led to the detection
of the following accounting irregularities perpetrated by Crazy Eddie
personnel:
5. Assume that you were a member of the Crazy Eddie audit team in 1986. You
were assigned to test the client’s year-end inventory cutoff procedures. You
selected 30 invoices entered in the accounting records near year-end: 15 in
the few days prior to the client’s fiscal year-end and 15 in the first few days
of the New Year. Assume that client personnel were unable to locate 10 of
these invoices. How should you and your superiors have responded to this
situation? Explain.
Ans.: We will try to locate alternative evidence, like delivery notes
acknowledged by customers; van drivers' log books to see which customers
they've recently delivered goods to. Also, use other procedures like analytical
procedures (e.g. compare GP ratio for this year and last year).