The financial statements of Cloudy Company, Inc., a publicly-traded company are given.

Cloudy Company, Inc.
Income Statement
Fiscal Year Ended April 30
	Year 4	Year 5	Year 6
Total Revenue	$575,117	$1,240,524	$4,845,347
Cost of Revenue	(284,058)	(576,694)	(2,050,779)
Gross Profit	291,059	663,830	2,794,568
Operating Expenses	(138,867)	(306,016)	(1,125,541)
Operating Income	152,192	357,814	1,669,027
Other income/(Expense)	-	-	143,659
Income Before Income Tax	152,192	357,814	1,812,686
Provision for Income Tax	-	(36,053)	(867,041)
Net Income	$152,192	$321,761	$945,645

Cloudy Company, Inc.
Balance Sheet
Year Ended April 30
	Year 4	Year 5	Year 6
Assets
Current Assets
Cash & Cash Equivalents		$30,321	$87,014
Receivables (Net)		-	693,773
Unbilled Charges		-	413,231
Other Current Assets		76,775	533,955
Total Current Assets		107,096	1,727,973
Long-Term Assets
Property & Equipment (Net)		57,490	3,059,455
Goodwill			22,249
Other Assets		13,450	235,994
Total Long-Term Assets		70,940	3,317,698
Total Assets		$178,036	$5,045,671
Liabilities & Shareholders' Equity
Current Liabiliites
Accounts Payable & Accrued Exp.		2930	265367
Equipment Purchases Payable			575000
ST Debt & Current portion LT Debt			928068
Total Current Liabilities		2930	1768435
Long-Term Liabilities
Capital Lease Obligation			428471
Deferred Federal Income Taxes			819014
Total Long-Term Liabilities		$0	$1,247,485
Shareholders' Equity
Common Stock		55,000	76,675
Additional Paid In Capital		55,000	942,325
Retained Earnings		65,106	1,010,751
Total Shareholders' Equity		175,106	2,029,751
Total Liabilities & Shareholders' Equity		$ 178,036	$ 5,045,671

Cloudy Company, Inc.
Statement of Cash Flows
Fiscal Year Ended April 30
	Year 4	Year 5	Year 6
Operating Activities
Net Income			$945,645
Add Noncash items:
Depreciation			97,588
Deferred Income Taxes			819,014
Changes In Operating Accounts:
Increase in Receivables			(693,773)
Increase in Unbilled Charges			(413,231)
Increase in Other Current Assets			(457,180)
Increase in Accounts Payable			262,437
Cash Flows from Operating Activities			560,500
Investing Activities
Purchase of Prty., Plants, & Eqpmt.			(3,099,553)
Acquistion of Goodwill			(22,249)
Acquistion of Other Assets			(222,544)
Cash Flows from Investing Activities			(3,344,346)
Financing Activities
Proceeds from Short-Term Borrowing			928,068
Proceeds from Capital Lease Borrowing			428,471
Proceeds from Common Stock issuance			909,000
Proceeds from Equipment Purch. Borrowing			575,000
Cash Flows from Financing Activities			2,840,539
Net Cash Flow			56,693
Beginning Cash Balance			30,321
Ending Cash Balance			$87,014

The financial statements are adapted from a company that was involved in securities fraud. The alleged perpetrator of the fraud was the founder/Chief Executive Officer (CEO) of the company.

Leading up to the fraud allegation, the company had been in existence for a few years. Hence, the attached financial statements include income statements for years ended 4, 5, and 6; balance sheets or years 5 and 6; and a statement of cash flows for the year ended 6.

You've been hired as the forensic accountant to investigate whether or not fraud has occurred, and if so, the extent of the fraud. Use the financial statements and information provided in the instructions below to create a detailed fraud investigation report by responding to the following questions/topics:

1. Compute and interpret the common-size analysis for the income statement and balance sheet for each year provided.
2. Compute and interpret the trend analysis for the income statement and balance sheet for each year provided.

o Compute the cash flows analysis; that is, indicate the major uses and sources of cash, and the relationship of net income to accruals.

o What are some of the possible questions raised by the cash flows analysis?

o Which items on the cash flow analysis would you investigate further and why?

1. Compute and interpret the ratios analyses for years 4, 5, and 6 for the income statements; for years 5 and 6 for the balance sheets; and for year 6 for the statement of cash flows. The ratios must include at least the following:

o Liquidity (current and net working capital)

o Profitability (gross margin, return on sales, return on assets, and return on equity)

o Efficiency (total assets turnover, accounts receivable turnover, and accounts receivable days)

o Leverage (debt to assets, equity to assets, debt to equity, and equity multiplier)

1. What do the above analyses indicate about the relationships between the income statements and balance sheets?
2. Based on your understanding of the financial data, which areas of each financial statement need further attention? Be sure to provide rationale and support for your assertions.
3. CPA firms audited the attached financial statements; a local CPA firm audited years 4 and 5, while an out-of-state CPA firm audited year 6. Although year 7 statements were not provided to you, one of the big CPA firms reviewed the interim financial statements for year 7. Discuss the following about the audits and reviews:

o The nature of assurances on the financial statements.

o Accounting principles and concepts violated by Cloudy Company.

o The context of the presentation of the financial statements. Who were the primary users of the financial statements?

In addition to the financial statements provided, indicate what other evidence you will use in the course of your investigation. In addition to the CEO, who is the primary suspect, which organizational positions will you interview, and in what order you will conduct the interviews? Examples of such positions or representatives include the accountant, Chief Financial Officer (CFO), clerks, and secretary.

Answer rating: 100% (QA)

Securities Fraud investigation Introduction The reports purpose is to report on Cloudy Company Incs fraud investigation The report shall consider organizational information on its potential The paper ... View the full answer