Rocky Mountain Accounting Case Study Solution for Inventory Overstatement

1.        Yes, the overstatement did affect the year end
financial statements for Rocky Mountain for 1985.  It
resulted in inventory being 1,076,000 more than it should
have been, and net income was $600,000 more than it
would have been if the overstatement did not occur.  This is
material enough to cause the financial statements to be
affected by the fraud.

2.         The auditors could have done a couple of things to
prevent the overstatement of inventory on the 1985 balance
sheet.  The auditors could have confirmed inventory count
sheets:  This could have been prevented if the auditors
were observing random cycle counts, if the auditors
randomly performed cycle count audits, or if the auditors
observed an entire physical inventory.  A second step the
auditors could have done would be to confirm balances with
the debtor.  The biggest step they could have taken, which
would also be the best way to prove the year end inventory
number, would be to do an entire physical inventory.  

3.        RMUC had a stronghold on Stretchlon.  This
stronghold resulted in the fraudulent activity by the
executives not look as fraudulent because they had an
outside party lie for them to be able to increase their
financial position on the financial statements.