Please read the scenario below carefully, and answer the questions completely. Be sure to answer all parts of each question.

Scenario

Nancy Drew is the assistant head accountant at Mystery Company, a manufacturer of juvenile novels. The company presently has total sales of $20 million. It is the end of the first quarter. Nancy is hurriedly trying to prepare a trial balance so that quarterly financial statements can be prepared and released to management and the regulatory agencies. The total credits on the trial balance excel the debits by $1,000. In order to meet the 4 p.m. deadline, Nancy decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chooses Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Nancy plugs the difference! She believes that the difference will not affect anyones decisions. She wishes that she had another few days to find the error but realizes that the financial statements are already late.

1. Fraud:

Is there fraud involved in the action by Nancy in the scenario? In answering this question, comment on whether all five components of fraud are present. The five components of fraud are (1) intention, (2) misstatement of fact, (3) materiality, (4) justifiable reliance, and (5) loss or damage suffered by the victim.

2. GAAP:

Is the action by Nancy in compliance with Generally Accepted Accounting Principles (GAAP)? Which accounting principles, if any, are violated? In your answer, consider the following accounting assumptions and principles:

time period assumption revenue recognition principle

economic entity assumption matching (expense recognition) principle

monetary unit assumption historical cost principle

going concern assumption fair value principle

full disclosure principle

3. Stakeholders:

Identify the stakeholders in this situation, and tell how each of them would be harmed or benefited by Nancys decision.

4. Recommendation:

What would you do if you were the assistant head accountant in this scenario?