fraud examination 457761

XYZ Technologies, Inc. designs, manufactures, and markets an extensive line of PC cards. The company sells its PC cards primarily to original equipment manufacturers (OEMs) for industrial and commercial applications. The OEM market served by the company has intensive competition. Many OEM companies ran into financial difficulties in 2010. The following are part of the company’s financial statements. Look at them carefully.

1. Identify the red flags.

2. Determine what kind of financial statement fraud the company may be involved in.

XYZ Technologies, Inc.

Consolidated Balance Sheet (partial)

Assets

Unaudited

Dec. 31, 2011 Dec. 31, 2010

Current assets

Cash and cash equivalents $6,181,520 $ 970,446

Available for sale securities 4,932,763 0

Accounts receivable, net of

allowance for doubtful

accounts of $148,300 and

$139,200 at Dec. 31, 2011

and 2010, respectively 12,592,231 3,932,170

Inventories 18,229,317 8,609,492

Other current assets 18,229,317 8,609,492

Total current assets 60,165,148 22,121,600

XYZ Technologies, Inc.

Consolidated Income Statement (partial)

Year ended December 31

Unaudited

2011 2010 2009

Sales $37,847,681 $12,445,015 $8,213,236

Cost of goods sold 15,895,741 6,832,927 4,523,186

Gross margin 21,951,940 5,612,088 3,690,050