7-38 objective 7-4) Nefret Stores is a large discount cosmetic department store chain. The company has recently expanded from 5 15 stores by borrowing from several large to financial institutions and from public offering of common stock. A recent investigation a has disclosed that Nefret materially overstated net income. The company understated their accounts payable and recorded fictitious supplier credits that further reduced accounts payable. As a result, an Income& Sales Tax Department i was critical of the evidence gathered by Nefret's audit firm, Abdul& El-Emir, in testing accounts payable and the supplier credits 1. et created a 250-page list of approximately 1,000 vendors, supporting advertising credits of $500,000. Nefret's auditors selected of of the a sample 8 2,500 items for direct confirmation. One item confirmed by telephone, one was traced to cash receipts one to a vendors credit memo for of the amount and part cash receipts for the rest, and one to a vendor's credit Two of the amounts memo. confirmed differed from the amount on the list, but the auditors did not seek an explanation for the differences because the amounts were not material The rest of the credits were tested by selecting 30 items(several from each page of the list). Fourteen of the items were supported by the ads placed examining and sixteen were supported by Nefret debit charging the vendors for the memos promotional allowances 2. Nashwa Credits-Nefret created 28 fictitious credit totaling $363,000 memos from Nashwa Distributions, the main supplier of health and beauty aids to Nefret. Nefret's controller initially told the auditor that the credits were for returned goods, then said they were a volume discount, and finally stated that the y were a payment so that Nefret would continue to use Nashwa as a supplier. However, an Abdul& El-Emir staff auditor noticed the amount and concluded that a $257,000 payment to retain Nefret's business was too large to make economic sense. The credit memos indicated that the credits were for damaged merchandise volume rebates, and advertising allowances. The audit firm requested a co firmation of the credits. In response, Ramses Abdullah, the president of Nefret Stores, placed call to Saria Wasir, the president of Nashwa, and handed the phone to the staff auditor. In fact, the call had been placed to an officer of Nefret. The Nefret oficer posing as Wasir, orally confirmed the credits. Nefret refused to allow Abdul& El-Emir to obtain written confirmation supporting the credits. Although the staff auditor doubted the validity of the credits, the audit partner, Mufti Hussein accepted the credits based on the credit memoranda, telephone confirmation of the credits, and oral representation of Nefret officers
7-38 objective 7-4) Nefret Stores is a large discount cosmetic department store chain. The company has recently expanded from 5 15 stores by borrowing from several large to financial institutions and from public offering of common stock. A recent investigation a has disclosed that Nefret materially overstated net income. The company understated their accounts payable and recorded fictitious supplier credits that further reduced accounts payable. As a result, an Income& Sales Tax Department i was critical of the evidence gathered by Nefret's audit firm, Abdul& El-Emir, in testing accounts payable and the supplier credits 1. et created a 250-page list of approximately 1,000 vendors, supporting advertising credits of $500,000. Nefret's auditors selected of of the a sample 8 2,500 items for direct confirmation. One item confirmed by telephone, one was traced to cash receipts one to a vendors credit memo for of the amount and part cash receipts for the rest, and one to a vendor's credit Two of the amounts memo. confirmed differed from the amount on the list, but the auditors did not seek an explanation for the differences because the amounts were not material The rest of the credits were tested by selecting 30 items(several from each page of the list). Fourteen of the items were supported by the ads placed examining and sixteen were supported by Nefret debit charging the vendors for the memos promotional allowances 2. Nashwa Credits-Nefret created 28 fictitious credit totaling $363,000 memos from Nashwa Distributions, the main supplier of health and beauty aids to Nefret. Nefret's controller initially told the auditor that the credits were for returned goods, then said they were a volume discount, and finally stated that the y were a payment so that Nefret would continue to use Nashwa as a supplier. However, an Abdul& El-Emir staff auditor noticed the amount and concluded that a $257,000 payment to retain Nefret's business was too large to make economic sense. The credit memos indicated that the credits were for damaged merchandise volume rebates, and advertising allowances. The audit firm requested a co firmation of the credits. In response, Ramses Abdullah, the president of Nefret Stores, placed call to Saria Wasir, the president of Nashwa, and handed the phone to the staff auditor. In fact, the call had been placed to an officer of Nefret. The Nefret oficer posing as Wasir, orally confirmed the credits. Nefret refused to allow Abdul& El-Emir to obtain written confirmation supporting the credits. Although the staff auditor doubted the validity of the credits, the audit partner, Mufti Hussein accepted the credits based on the credit memoranda, telephone confirmation of the credits, and oral representation of Nefret officers
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