Fraudulent sales are occasionally recorded at year-end as a means of overstating financial results. As examples, companies may engage in inappropriate bill and hold transactions or channel stuffing.a. Describe two conditions that might indicate the recording of fraudulent sales.b. Define bill and hold transactions and describe the audit significance of such transactions.c. Define channel stuffing and describe the audit significance of this practice.

Question

What will be an ideal response?

Answer 1

a. The following conditions may indicate the recording of fraudulent transactions:
Unusually large increases in year-end sales to a single customer or a few. 
Large increases in revenue and receivables along with increases in gross profit margins that are inconsistent with the client's experience or industry averages. 
Inappropriate changes in accounting principles that result in an increase in recorded revenue. 
Substantial sales returns following the balance sheet date. 
b. Bill and hold transactions are sales that are billed but goods are not shipped. The audit significance is that stringent accounting requirements must be met for the transaction to qualify as sales. 

c. Channel stuffing involves providing large inducements to resellers to buy substantially more inventory than they can resell in a normal period of time. The audit significance is that an adequate allowance for sales returns must be established to appropriately account for the transactions.