REGINA, INC., was a fast-srowins floor-care company that went public in 1985 and went bankrupt in 1988. Resina went from a one-product company with \($60\) million in sales in 1985 to a four-product company with \($181\) million in sales in 1988. Reported eaminss climbed from \($1.1\) million in 1985 to \($10.9\) million in 1988.

Following the bankruptcy, investigations revealed a massive management fraud. It seems that in an effort to boost sales, sound business practices were changed and the accounting records were modified accordingly For example, product quality testing was reduced or, in some cases, eliminated. As a result, Regina had many returned products. In fact, in one quarter more than 40,000 Housekeeper vacuum cleaners were retumed. This volume of returns was so unexpected that a separate building had to be leased to store the defective products. These returns were not recorded on Regina's books. In addition, revenues were recorded when orders were received rather than when goods were shipped. This practice accelerated recognition of revenue beyond accepted norms. Finally, Regina modified its computer system to generate fictitious invoices. Approximately 200 invoices worth \($5.4\) million in sales were created during the last 3 business days of the fiscal year ended on June 30, 1988.

Uncovering the combined effect of these fraudulent activities led to restating 1988 income of \($10.9\) million to a loss of \($16.8\) million. Dan Sheelan, the president of Regina and the driving force behind these activities, was required to pay substantial fines and was eventually sentenced to serve time in prison.

How could an auditor have used the retail inventory method to detect that Regina was recording sales when orders were received rather than when goods were shipped?