Hi dear Expert Tutor

please answer these questions:

The case study of Sleeptight's :

Sleeptight's principal activity is the mmanufacture and sale of expensive high-quality beds which are largely sold to luxury hotels and owners of holiday apartments. Early this year, the accountant of Sleeptight were found guilty for committing financial statement fraud since the last three accounting period. The accountant used many schemes to perpetuate the fraud, one of which was to hide a $20 million accounts payable from the auditors and show it as a payable arising in the following year. To conceal the fraud, the accountant altered purchasing records, using correction fluid, and provided only photocopies of the records to the auditors.

Currently, Sleeptight requires customers who place an order to pay a deposit of 40% of the total order value at the time the order is placed. The beds will take 4 to 8 weeks to build, and the remaining 60% of the order value is due within a week of the final delivery. Risks and rewards of ownership of the beds do not pass to the customer until the beds are delivered and signed for. Beds also come with a two-year guarantee and the financial controller has made a provision in respect of the expected costs to be incurred in relation to beds still under guarantee.

Although the company does have some employees working in the workshop, it often uses external subcontractors to help make the beds in order to fulfil all its orders. These subcontractors should invoice Sleeptight at the end of each month for the work they have carried out, but sometimes do not get round to it until the following month.

The company undertakes a full count of raw materials at the year end. The quantities are recorded on inventory sheets and the financial controller assigns the costs based on the cost assigned in the previous year or, if there was no cost last year, using the latest invoice. Most beds are made of oak or other durable woods and the cost of these raw materials is known to fluctuate considerably.

It is expected that work in progress will be insignificant this year, but there will be a material amount of finished goods awaiting dispatch. Anna Jones will estimate the value of these finished goods and has said she will take into account the order value when doing so.

There has been steady growth in sales in recent years and in January 20X0 Sleeptight purchased a building close to its existing workshop. Anna and Sophie plan to turn this into another workshop which should more than double its existing manufacturing capacity. The new workshop is currently undergoing extensive refurbishment in order to make it suitable for bed manufacturing.

The purchase of the new premises was funded by a bank loan repayable in monthly instalments over 12 years and has covenants attached to it. These covenants are largely profit related measures and if they are breached the bank has the option to make the remaining loan balance repayable immediately.

In July 20XO, Sleeptight signed a loan guarantee as a third party for SYD Company, a newly formed organization focused on pharmaceutical research and development. Because Sleeptight was a reputed and successful company, the loan was processed and approved by National Bank upon the application. Due to the nature of the pharmaceutical industry, SYD projects are considered inherently risky. The company is currently awaiting KMM's approval of a miracle drug that, according to marketing research, has the potential to generate millions of dollars of revenue per year. If the drug is not approved, SYD will not have the financial resources to continue business. The loan guarantee by Sleeptight will come into effect, and Sleeptight will have to front the full amount of the loan.

The questions:

QUESTION 1

a) Describe with example four (4) other ways a company might use to commit liability fraud.

b) Using the information provided, IDENTIFY and EXPLAIN any two (2) red flags/risks which could provide opportunities for liability fraud activities.

QUESTION 2

a) Using the information provided, IDENTIFY and EXPLAIN any two (2) red flags/risks which could provide opportunities for inventory fraud activities.

b) Using the information provided, IDENTIFY and EXPLAIN any two (2) red flags/risks which could provide opportunities for revenue fraud activities.

QUESTION 3

a) Explain under what circumstances must a contingent liability be recorded on the balance sheet or disclosed in the notes?

b) Discuss the appropriate accounting treatment for the SYD Company transaction with Sleeptight