For Assignment 2 your team will select a public company and perform an assessment of the risk the company is reporting fraudulent financial statements. It can be any company. Larger companies may be more difficult. I would recommend a small to mid-size company in a competitive industry. Possibly a newer company which is trying to make it. It must be a public corporation. You must submit your company to me for approval prior to beginning your assignment. The objective of this project is not to find a company that you determine could be committing financial statement fraud, but to go through the review to make a judgement on the likelihood it is, or identify issues of concern. Assume you are an investor looking at this company as an investment, or working at an accounting firm and you are looking at this company as an audit client. Of course, it would be more fun to find a company that your review supported possible fraud. To understand how financial statement changes can signal fraud, you must be familiar with the nature of the three primary financial statements, balance sheets, income statements, and statement of cash flows. Balance sheets and income statements are converted from position and period statements to change statements in four ways: Comparing account balances in the statements from one period to the next.Calculating key ratios and comparing them from one period to the next.Performing vertical analysis.Performing horizontal analysis. Please read and refer to Chapter 6, Analyzing Financial Statements, (Pages 187 through 194.) Information in Chapters 11, 12 and 13 provide details of management fraud which will also give insight to your understanding of financial statement fraud. Chapters 11 – 13 are assigned for Week 5, Assignment 2 is due April 25th. Studying these chapters prior to completing Assignment 2 will be very important. Your report will compare and analyze the company’s balance sheets, income statements and statements of cash flow as necessary using three to five years of data, and incorporating the common ratios listed in Table 6.2 as applicable. Analyzing the statements with vertical and horizontal analysis as illustrated in Chapter 6, Figures 6.7, 6.8, 6.9, 6.10 and 6.11, would probably be useful as well. Compare the results of your analysis with one other company in the industry of the company you are evaluating, or with industry wide comparisons, if available. The examples detailed in the book of John Doe Company and ESM Government are good examples of this assignment. After you have completed your calculations and comparisons, you should document your findings, analysis and conclusions in a five (5) to eight (8) page report, not including your exhibits. Basically, support your conclusion of the possibility of fraud existing, or not existing in the company financial statements, using your calculations and analysis as rationale. Discuss any ratios of interest and the basis of that interest. Horizontal and vertical analysis.
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