Retro Technologies designs, manufactures and markets an extensive line of PC cards. The company sells these cards primarily to original equipment manufacturers (OEMs) for industrial and commercial applications in a market with intense competition. In fact, many OEM companies ran into financial difficulty in 2016 because of intense competition. The following selected data is taken from the companys financial statements:

Partial Consolidated Balance Sheet (unaudited) December 31, 2016 December 31, 2015

Current Assets

Cash & Cash Equivalents $6,181,520 $970,446

Available-for-Sale Securities $4,932,763

Accounts Receivable (net of Allowance for

Doubtful Accounts of $148,300 and $139,200

At December 31, 2016 and 2015, 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

Partial Income Statement (unaudited) Year Year Year

Ended Ended Ended

12/31/2016 12/31/2015 12/31/2014

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

1.Determine the red flags that exist in these financial statements. Describe the scenarios that might contain these symptoms.

2.Based upon the red flags and the scenarios identified above, determine the nature and extent of possible financial statement fraud, paying close attention to sales, cost of goods sold and the allowance for doubtful accounts receivable.