Read the following case about MiniScribe and answer the following questions.

a. How did MiniScribe inflate its financial statements?

b. What are some of the factors that led to the inflated financial statements?

c. What red flags should have raised the auditor’s suspicions about phony sales and other attempts to inflate income?

d. What substantive audit procedures could have uncovered the fraud?

In October 1988, MiniScribe, a computer disk drive manufacturer, announced its 13th consecutive record-breaking quarter, while its competitors were laying off hundreds of employees. MiniScribe's receivables had increased significantly, and inventories had increased to a dangerous level because disk drives can become obsolete from one quarter to the next. The company's stock price had quintupled in just two years. It had apparently risen from the dead under the leadership of Q. T. Wiles, who had resurrected other companies and was known as Dr. Fix-It. It looked as if he had done it again.

Seven months later, it was announced that MiniScribe's sales gains had been fabricated. What was supposed to be the crowning achievement of Wiles's career became an epitaph; he resigned and is living in near seclusion.

An internal investigation concluded that senior management apparently perpetrated a massive fraud on the company, its directors, its outside auditors, and the investing public. Most of MiniScribe's top management was dismissed, and layoffs shrank its employment by more than 30% in one year. MiniScribe might have to write off as much as $200 million in bad inventory and uncollectible receivables.

Wiles's unrealistic sales targets and abusive management style created a pressure cooker that drove managers to cook the books or perish. The managers responded by booking sales prematurely, manipulating reserves, and simply fabricating figures in order to maintain the illusion of unbounded growth even after the industry was hit by a severe slump.