CASE 2

You are an auditor at a public accounting firm. You and your team are entrusted by Partner to
handle clients engaged in the home appliance retail business. Your client is a company that has
go public. The client's financial statement in the previous year reported a loss, however this year
reported a material gain. After you check, it turns out that the client reports income that is not
much different from the previous year, however, there can be a profit due to the decrease in Cost
of Goods Sold (COGS). The client reports that the amount of inventory has increased drastically,
even though sales have not increased and the account payable balance is almost the same as in
previous years, this has led to suspicion of a double counting scheme in the client's inventory. In
addition, when a random check was carried out incidentally at one of the client's warehouses, it
was found that many inventory were out of date but the client did not make adjustments.
Question:
a. If you wanted to perform an analytical procedure to check the suspected occurrence of this
double counting scheme, what ratio would you calculate? Explain your answer!
b. What assertions are related to the above case? Explain your answer!