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Mountain State Sporting Goods
Transcript of Mountain State Sporting Goods
Bethany Spates, Caleigh Miller, Salem Ameri
Kentucky Corporation built in 1993 by J.D. Smith
There is a strong possibility that audited financial statements would reduce fraudulent activity, but it is also possible that some fraud may be missed because of collusion among Workman and Hess.
Major Accounting Policies
Opportunity for fraud is more prevalent because a lack of audited financial statements reduces the likelihood of uncovering fraud.
Fraud Triangle Relating to Mountain State
Smith passes in 2006
Thomas A. Workman took control in 2007
Business valued at $350,000 in 2006
Large merchandise mix
Converted to the periodic method
Use FIFO method
Use accrual method of accounting
Motivates the crime.
Ex. financial trouble, productivity expectations, etc.
Justifies the crime.
Ex. "I'll pay it back", "I didn't get a raise so I deserve this", etc.
Method used for the crime.
Ex. lack of internal controls, not checking inventory, etc
Workman desired a certain type of lifestyle.
Accounting for pawn loans
Lack of family in management
Key employees leaving
Lack of segregation of duties
Lack of auditor independence
Repayment of loans
Switch of inventory methods
Bonuses were not awarded until goals were met
"I'm getting what I deserve."
Journal Entry Testing
Financial Statement Analysis
1. JEs made to unrelated, unusual, or seldom-used accounts
8/20/2006 Outside Services 15,000
Leasehold Improvements 15,000
3/01/2007 Sales 45,000
Loan from Employee 45,000
2. JEs made by individuals typically not part of the JE process
3. JEs recorded at the end of the period or as post-closing entries with little or no explanation
4. JEs containing round numbers or a consistent ending number
5. JEs applied to intercompany or related parties.
3/07/2008 Sales 15,000
Payroll Liabilities Payable 15,000
3/07/2008 Sales 10,000
Long Term Debt 10,000
3/09/2008 Cost of Goods Sold 6,000
Auto Lease 6,000
3/09/2008 Advertising and Promotion 12,500
Travel and Entertainment 12,500
Journal Entry Testing cont.
2/28/2009 Equipment 40,000
Loan to Employees 40,000
3/09/2008 Insurance Expense 5,000
Outside Labor 5,000
Key People cont.
Accounting and Payroll Duties
"First 15 days were hell"
Limited involvement after 01/06/07
Married to Thomas Workman
Trained by Hess & Associates, CPA
Isn't full time
Relationship with Hess
CPA since 1994
"Workman needs a good lawyer"
Appendices provided for the case