The questions are given in the last image.

FINANCIAL STATEMENT FRAUD HOMEWORK Review the following financial statements, footnotes, and the horizontal and vertical analyses for ABC Corporation. Then answer the four questions at the end of the homework thoroughly. A perfect score will be awarded for papers that identify at least 20 valid answers across the four questions. Print out your answers and submit them in class. ABC CORPORATION CONSOLIDATED INCOME STATEMENTS ($ thousands) 2016 2015 Net Sales Cost of Sales Gross Margin $ 184,861 137,936 46,925 $ 113,951 111,445 2,506 Selling, General & Administrative Research & Development Total Operating Expenses 14,459 8,555 23,014 12,217 4,204 16,421 Income (loss) from Operations Other Income Other Expenses Income (Loss) before Income Taxes 23,911 1,291 (2,142) 23,060 (13,915) 708 (3,174) (16,381) Provision for Income Taxes 2,779 392 Net Income $ 20,281 $ (16,773) ABC CORPORATION CONSOLIDATED BALANCE SHEETS 2016 2015 $ 16,329 $ 23,244 ($ thousands) ASSETS Current Assets Cash Accounts Receivable, net of allowance of $736 and $752 Inventories Other current assets Total current assets 39,766 45,106 936 16,041 22,501 239 62,025 102,137 Property & Equipment, net Other assets 33,606 1,134 19,588 253 TOTAL ASSETS $ 136,877 $ 81,866 $ 37,160 946 $ 12,228 1,745 LIABILITIES & EQUITY Current Liabilities Accounts Payable Current Portion of LT Debt Accrued Compensation & Related Expenses Accrued Warranty Expense Other Current Liabilities Total Current Liabilities 2,824 1,373 4,383 1,740 2,085 3,275 21,073 46,686 Long-Term Debt 23,877 20,771 Stockholders Equity 66,314 40,022 TOTAL LIABILITIES & EQUITY $ 136,877 $ 81,866 ABC CORPORATION FOOTNOTES Footnote 1-Inventory The Company's inventory is stated at the lower of cost or market using the first-in-first out method of accounting. In 2015, the Company increased its reserve for excess inventory as a result of general decline in the demand for its products and severe price competition. In 2016, this reserve was reduced by $2.1 million as a result of a general improvement in demand and the ability of the Company to sell inventory at higher prices than anticipated. Footnote 2 - Property, Plant & Equipment Property plant and equipment are recorded at cost. Depreciation is recorded using the straight- line method of accounting over the useful lives of the assets. In 2015, the Company established a reserve of $1.3 million to provide for excess manufacturing capacity, predominantly leasehold improvements and manufacturing equipment. In 2016, this reserve was reduced as the Company began to fully utilize its manufacturing capacity. Footnote 3 -Long-Term Debt Interest Expense for the years ended December 28, 2016 and 2015, which is included in other expenses in the consolidated statements of operations was approximately $2,142,000 and $3,010,000. At December 28, 2016, the Company was in violation of one of the financial ratio covenants of the revolving credit facility. Subsequent to December 28, 2016, the Company was in violation of certain covenants related to the timely submission of certain financial information to the banking group. The banking group has waived these violations without requiring any modifications to the terms and conditions of the agreement. Footnote 4 - Related Party Transactions A director of the Company is also a director of Dexter Corporation, from which the Company formerly purchased substantially all of its SSD media and some of its HDD media. During 2016 and 2015, the Company's purchases from Dexter totaled approximately $12.2 million and $3.2 million, respectively. Purchases from Dexter prior to 2015 were not significant. Additionally, the Company's Chairman of the Board and Chief Executive Officer is Chairman of the Board of Comdisk, Inc., from which the Company purchases certain computer chips. During 2016 and 2017, the Company's purchases from Comdisk totaled approximately $1.7 million and $1.2 million, respectively. Purchases from Comdisk prior to 2015 were not significant. Also, during 2014, the Company issued shares of Common Stock to certain officers of the Company in exchange for noninterest-bearing notes. The notes from each officer were collateralized by these shares. Payment term was 2 years and shares vested during that period. Footnote 5 - Litigation In October 2016, ADM, Inc. filed a complaint in the United States District Court for the District of Colorado initially charging the Company with infringement of United States Patent No. 4,568,988. In February 2017, ADM, Inc. amended the complaint and added an added an additional (United States Patent No. 4,368,383) accused to be infringed by the Company, Footnote 6 - Subsequent Event On January 14, 2017, the Company was advised that it is the subject of an informal inquiry by the Securities and Exchange Commission. The Company has no reason to believe that the outcome of the inquiry will have a materially adverse effect on the financial condition of the Company. ABC CORPORATION CONSOLIDATED INCOME STATEMENTS Horizontal Change Horizontal Percentage Vertical Percentage 2016 2015 ($ thousands) 2016 2015 Net Sales Cost of Sales Gross Margin $ 184,861 137,936 46,925 $ 113,951 111,445 2,506 $ 70,910 26,491 44,419 62.23% 23.77% 1772.51% 100.00% 74.62% 25.38% 100.00% 97.80% 2.20% Selling, General & Administrative Research & Development Total Operating Expenses 14,459 8,555 23,014 12,217 4,204 16,421 2,242 4,351 6,593 18.35% 103.50% 40.15% % 7.82% 4.63% 12.45% 10.72% 3.69% 14.41% Income (loss) from Operations Other Income Other Expenses Income (Loss) before Income Taxes 23,911 1,291 (2,142) 23,060 (13,915) 708 (3,174) (16,381) 37,826 583 1,032 39,441 -271.84% 82.34% -32.51% -240.77% 12.93% 0.70% -1.16% 12.47% - 12.21% 0.62% -2.79% -14.38% Provision for Income Taxes 2,779 392 2,387 608.93% 1.50% 0.34% Net Income $ 20,281 $ (16,773) $ 37,054 -220.91% 10.97% -14.72% ABC CORPORATION CONSOLIDATED BALANCE SHEETS Horizontal Change Horizontal Percentage 2016 Vertical Percentage 2016 2015 2015 $ 16,329 $ 23,244 $ (6,915) -29.75% 11.93% 28.39% ($ thousands) ASSETS Current Assets Cash Accounts Receivable, net of allowance of $736 and $752 Inventories Other current assets Total current assets 39,766 45,106 936 102,137 16,041 22,501 239 23,725 22,605 697 40,112 147.90% 100.46% 291.63% 64.67% 29.05% 32.95% 0.68% 74.62% 19.59% 27.49% 0.29% 75.76% 62,025 Property & Equipment, net Other assets 33,606 1,134 19,588 253 14,018 881 71.56% 348.22% 24.55% 0.83% 23.93% 0.31% TOTAL ASSETS $136,877 $ 81,866 $ 55,011 67.20% 100.00% 100.00% $ 37,160 946 $ 12,228 1,745 $ 24,932 (799) 203.89% -45.79% 27.15% 0.69% 14.94% 2.13% LIABILITIES & EQUITY Current Liabilities Accounts Payable Current Portion of LT Debt Accrued Compensation & Related Expenses Accrued Warranty Expense Other Current Liabilities Total Current Liabilities 62.30% -34.15% 2,824 1,373 4,383 46,686 1,740 2,085 3,275 21,073 1,084 (712) 1,108 25,613 33.83% 2.06% 1.00% 3.20% 34.11% 2.13% 2.55% 4.00% 25.74% 121.54% Long-Term Debt 23,877 20,771 3,106 14.95% 17.44% 25.37% Stockholders Equity 66,314 40,022 26,292 65.69% 48.45% 48.89% TOTAL LIABILITIES & EQUITY $ 136,877 $ 81,866 $ 55,011 67.20% 100.00% 100.00% QUESTIONS 1. What red flags of fraud are indicated in the horizontal analysis of the financials of ABC Corporation? Explain any and all unusual items. (Note: Remember that the change in a single financial statement item, even if large, does not itself constitute a red flag. To identify unusual items, changes in one item should be compared to changes in another.) 2. What red flags of fraud are indicated in the vertical analysis of the financials of ABC Corporation? Explain any and all unusual items. 3. Based on your reading of the financial statements and the results of the horizontal and vertical analyses, describe any and all possible management fraud schemes or techniques for which there are identifiable symptoms. BE SPECIFIC. For each scheme or technique give the analytical support you have found. 4. What red flags of fraud are indicated in your reading of the footnotes to the financials of ABC Corporation? What fraud schemes that these red flags indicate? FINANCIAL STATEMENT FRAUD HOMEWORK Review the following financial statements, footnotes, and the horizontal and vertical analyses for ABC Corporation. Then answer the four questions at the end of the homework thoroughly. A perfect score will be awarded for papers that identify at least 20 valid answers across the four questions. Print out your answers and submit them in class. ABC CORPORATION CONSOLIDATED INCOME STATEMENTS ($ thousands) 2016 2015 Net Sales Cost of Sales Gross Margin $ 184,861 137,936 46,925 $ 113,951 111,445 2,506 Selling, General & Administrative Research & Development Total Operating Expenses 14,459 8,555 23,014 12,217 4,204 16,421 Income (loss) from Operations Other Income Other Expenses Income (Loss) before Income Taxes 23,911 1,291 (2,142) 23,060 (13,915) 708 (3,174) (16,381) Provision for Income Taxes 2,779 392 Net Income $ 20,281 $ (16,773) ABC CORPORATION CONSOLIDATED BALANCE SHEETS 2016 2015 $ 16,329 $ 23,244 ($ thousands) ASSETS Current Assets Cash Accounts Receivable, net of allowance of $736 and $752 Inventories Other current assets Total current assets 39,766 45,106 936 16,041 22,501 239 62,025 102,137 Property & Equipment, net Other assets 33,606 1,134 19,588 253 TOTAL ASSETS $ 136,877 $ 81,866 $ 37,160 946 $ 12,228 1,745 LIABILITIES & EQUITY Current Liabilities Accounts Payable Current Portion of LT Debt Accrued Compensation & Related Expenses Accrued Warranty Expense Other Current Liabilities Total Current Liabilities 2,824 1,373 4,383 1,740 2,085 3,275 21,073 46,686 Long-Term Debt 23,877 20,771 Stockholders Equity 66,314 40,022 TOTAL LIABILITIES & EQUITY $ 136,877 $ 81,866 ABC CORPORATION FOOTNOTES Footnote 1-Inventory The Company's inventory is stated at the lower of cost or market using the first-in-first out method of accounting. In 2015, the Company increased its reserve for excess inventory as a result of general decline in the demand for its products and severe price competition. In 2016, this reserve was reduced by $2.1 million as a result of a general improvement in demand and the ability of the Company to sell inventory at higher prices than anticipated. Footnote 2 - Property, Plant & Equipment Property plant and equipment are recorded at cost. Depreciation is recorded using the straight- line method of accounting over the useful lives of the assets. In 2015, the Company established a reserve of $1.3 million to provide for excess manufacturing capacity, predominantly leasehold improvements and manufacturing equipment. In 2016, this reserve was reduced as the Company began to fully utilize its manufacturing capacity. Footnote 3 -Long-Term Debt Interest Expense for the years ended December 28, 2016 and 2015, which is included in other expenses in the consolidated statements of operations was approximately $2,142,000 and $3,010,000. At December 28, 2016, the Company was in violation of one of the financial ratio covenants of the revolving credit facility. Subsequent to December 28, 2016, the Company was in violation of certain covenants related to the timely submission of certain financial information to the banking group. The banking group has waived these violations without requiring any modifications to the terms and conditions of the agreement. Footnote 4 - Related Party Transactions A director of the Company is also a director of Dexter Corporation, from which the Company formerly purchased substantially all of its SSD media and some of its HDD media. During 2016 and 2015, the Company's purchases from Dexter totaled approximately $12.2 million and $3.2 million, respectively. Purchases from Dexter prior to 2015 were not significant. Additionally, the Company's Chairman of the Board and Chief Executive Officer is Chairman of the Board of Comdisk, Inc., from which the Company purchases certain computer chips. During 2016 and 2017, the Company's purchases from Comdisk totaled approximately $1.7 million and $1.2 million, respectively. Purchases from Comdisk prior to 2015 were not significant. Also, during 2014, the Company issued shares of Common Stock to certain officers of the Company in exchange for noninterest-bearing notes. The notes from each officer were collateralized by these shares. Payment term was 2 years and shares vested during that period. Footnote 5 - Litigation In October 2016, ADM, Inc. filed a complaint in the United States District Court for the District of Colorado initially charging the Company with infringement of United States Patent No. 4,568,988. In February 2017, ADM, Inc. amended the complaint and added an added an additional (United States Patent No. 4,368,383) accused to be infringed by the Company, Footnote 6 - Subsequent Event On January 14, 2017, the Company was advised that it is the subject of an informal inquiry by the Securities and Exchange Commission. The Company has no reason to believe that the outcome of the inquiry will have a materially adverse effect on the financial condition of the Company. ABC CORPORATION CONSOLIDATED INCOME STATEMENTS Horizontal Change Horizontal Percentage Vertical Percentage 2016 2015 ($ thousands) 2016 2015 Net Sales Cost of Sales Gross Margin $ 184,861 137,936 46,925 $ 113,951 111,445 2,506 $ 70,910 26,491 44,419 62.23% 23.77% 1772.51% 100.00% 74.62% 25.38% 100.00% 97.80% 2.20% Selling, General & Administrative Research & Development Total Operating Expenses 14,459 8,555 23,014 12,217 4,204 16,421 2,242 4,351 6,593 18.35% 103.50% 40.15% % 7.82% 4.63% 12.45% 10.72% 3.69% 14.41% Income (loss) from Operations Other Income Other Expenses Income (Loss) before Income Taxes 23,911 1,291 (2,142) 23,060 (13,915) 708 (3,174) (16,381) 37,826 583 1,032 39,441 -271.84% 82.34% -32.51% -240.77% 12.93% 0.70% -1.16% 12.47% - 12.21% 0.62% -2.79% -14.38% Provision for Income Taxes 2,779 392 2,387 608.93% 1.50% 0.34% Net Income $ 20,281 $ (16,773) $ 37,054 -220.91% 10.97% -14.72% ABC CORPORATION CONSOLIDATED BALANCE SHEETS Horizontal Change Horizontal Percentage 2016 Vertical Percentage 2016 2015 2015 $ 16,329 $ 23,244 $ (6,915) -29.75% 11.93% 28.39% ($ thousands) ASSETS Current Assets Cash Accounts Receivable, net of allowance of $736 and $752 Inventories Other current assets Total current assets 39,766 45,106 936 102,137 16,041 22,501 239 23,725 22,605 697 40,112 147.90% 100.46% 291.63% 64.67% 29.05% 32.95% 0.68% 74.62% 19.59% 27.49% 0.29% 75.76% 62,025 Property & Equipment, net Other assets 33,606 1,134 19,588 253 14,018 881 71.56% 348.22% 24.55% 0.83% 23.93% 0.31% TOTAL ASSETS $136,877 $ 81,866 $ 55,011 67.20% 100.00% 100.00% $ 37,160 946 $ 12,228 1,745 $ 24,932 (799) 203.89% -45.79% 27.15% 0.69% 14.94% 2.13% LIABILITIES & EQUITY Current Liabilities Accounts Payable Current Portion of LT Debt Accrued Compensation & Related Expenses Accrued Warranty Expense Other Current Liabilities Total Current Liabilities 62.30% -34.15% 2,824 1,373 4,383 46,686 1,740 2,085 3,275 21,073 1,084 (712) 1,108 25,613 33.83% 2.06% 1.00% 3.20% 34.11% 2.13% 2.55% 4.00% 25.74% 121.54% Long-Term Debt 23,877 20,771 3,106 14.95% 17.44% 25.37% Stockholders Equity 66,314 40,022 26,292 65.69% 48.45% 48.89% TOTAL LIABILITIES & EQUITY $ 136,877 $ 81,866 $ 55,011 67.20% 100.00% 100.00% QUESTIONS 1. What red flags of fraud are indicated in the horizontal analysis of the financials of ABC Corporation? Explain any and all unusual items. (Note: Remember that the change in a single financial statement item, even if large, does not itself constitute a red flag. To identify unusual items, changes in one item should be compared to changes in another.) 2. What red flags of fraud are indicated in the vertical analysis of the financials of ABC Corporation? Explain any and all unusual items. 3. Based on your reading of the financial statements and the results of the horizontal and vertical analyses, describe any and all possible management fraud schemes or techniques for which there are identifiable symptoms. BE SPECIFIC. For each scheme or technique give the analytical support you have found. 4. What red flags of fraud are indicated in your reading of the footnotes to the financials of ABC Corporation? What fraud schemes that these red flags indicate