VampiresRUs was the world's leading company in extracting blood. It had a number of charity and paid blood drives, which gave it the largest blood supply in the world. VampiresRUs was based on a profitable model, but in the last few decades, it had been focusing more on non-for-profit transactions because the demand for blood was increasing, but the ability to pay for the blood was decreasing. VampiresRUs was doing well for a blood-extraction company unless you compared it to the companies only in the business to make a profit. Slowly, employees and outsiders alike realized that VampiresRUs was declining in profits and could soon become a not-for-profit blood extraction company. The auditors realized the direction the company was going and resigned after not being paid for the previous year's audit. The internal auditors started performing most of the financial statement audit functions and found company records to be in perfect order. However, after a short time period, the auditors noticed that Jack, the company's CEO, was showing up to work in a new car each day. He claimed that he had saved a fortune and finally decided to spend the money on his passion-cars. The internal auditors, after seeing the sudden change, decided to analyze the company to ensure that fraud wasn't being committed by the CEO. To analyze the company, the internal auditors knew only to compute the following ratios:
- Gross profit margin
- Accounts Receivable Turnover
- Number of days in receivables
- Earnings per share
2011 2010
Sales 1,000,000 1,200,000
COGS 800,000 960,000
Accounts Receivable 500,000 600,000
Net Income 52,000 103,000
# of shares outstanding 100,000 100,000
Upon computing the above ratios, the internal auditors found nothing suspicious and concluded that fraud didn't exist.
Required
A. Compute the ratios listed above. Is there anything specific you see in the ratios that would indicate fraud?
B. How else could the internal auditors have searched/found fraud?