The OfficeMax accounting fraud previously described in the book is summarized briefly here:
The third largest office supply store in the United States, OfficeMax restated earnings for the first three quarters of 2004 because of problems related to its employees' fabrication of vendor payments. They are widely used in the retail world as a marketing tool. Companies pay a fee and receive better shelf space or advertise ments featuring their products. The company's employees generated false supporting documents for several million dollars in claims billed to a vendor. OfficeMax estimated that income was overstated by $4 to $6 million for the three quarters.
The nature of vendor payments makes them susceptible to fraud. When companies need to make quarterly revenue targets set by management or Wall Street analysts, they ask a supplier to give them a vendor allowance at that time for something they will buy in the future, thus allowing the company to meet its target revenue for the quarter. The company records vendor allowances as revenue at the end of the quarter although the inventory purchase will not be made until the following quarter, allowing the company to meet revenue targets for the quarter. 1
a. Suggest a substantive test of either balances or transactions that could be effective in detecting the misstatement.
b. How would the auditors use sampling to perform the tests? What is the population for the test? How will the auditors evaluate the test's outcome? Explain your answer.