CRAZY EDDY
...aspect of the Crazy Eddie business went through Antar, there was little or no internal control, which enabled him to get away with these schemes. The following are a number of key ratios for Crazy Eddie that has been computed for the years of 1984-1987: 1987 1986 1985 1984 Current Ratio 2.40 1.40 1.56 .92 Account Receivable Turnover 32.50 118.10 49.75 52.72 Inventory Turnover 2.50 3.25 3.90 4.58 Debt To Equity 1.26 1.94 1.72 4.82 Net Income Per Share .34 .48 .24 .18 Gross Profit Percentage 22.76% 25.88% 24.13% 22.11% Return on Assets .07 .22 .20 .22 From these numbers it is obvious that Crazy Eddie posed higher than normal audit risk. The current ratio for the years of 1984-1987 was relatively normal but in 1987 the tremendous growth to 2.40 indicates a low level of liquidity, meaning debts are harder to pay as they come due. Accounts receivable turnover also had a major jump in the year of 1986, which should have lead to some doubt. Inventory turnover was normal in the beginning years, but as it declined dramatically, there should have been an investigation as to the validity of the inventory. This was a red flag that should have been recognized. Gross profit margin is used to asses potential misstatements in operating expenses; these measures look consistent for Crazy Eddie. Return on assets declined in 1987 which is a sign of lack of profitability. The retail consumer electronics industry was undergoing rapid and dramatic changes during the 1980’s. Changes such as these have a great affect on audit planning procedures. With growth of business, planning for an audit should be taken to another level. There must be a great understanding of the clients industry which involves getting a consultant to gain expertise in that area. Internal control must be examined and risk must be assumed for the lack of internal control. With the changes of a business often come changes in the operation of the company and how the business is laid out; in planning an audit these issues must be addressed. . In the case of Crazy Eddie the rate at which the consumer electronics industry grew at that time is an indicator of potential audit risk. Internal controls were scarce and the company was laid out in bogus manner employing only Antars close relatives. The growth of Crazy Eddie coupled with the lack of competent planning led to much fraud. Lowballing is a practice where the audit firm provides auditing services for an unusually low cost then makes up the difference by offering other services, such as consulting services, and charging large sums of money for these services. This practice can compromise the quality of the audit services in a few ways. Firstly by making the audit of less importance to the audit firm, the audit itself will not be completed with due care. The focus will inevitably be on the more profitable service of consulting. Secondly the audit firm may lose its independence because by becoming more involved in another aspect of the company, the objective of the audit firm will shift from providing an accurate audit to increasing their own profits by ensuring a favorable outcome with the audit. Had I been working on the audit team of Crazy Eddie in 1986 and was assigned to test the year-end inventory, and client personnel were unable to locate 10 inv...