Change from straight line to double declining balance
The change may indicate that the company is facing financial problems and the change may cover-up the financial position of a company. Thus, an investigator may check the financial performance of the company over time. An investigator should check the depreciation expense account for an increase in depreciation expense and reduced operating income. In the case of straight line depreciation, the depreciation expense is expected to be constant over the years after eliminating assets disposed during the year. The manipulation can be corrected by the entries listed below.
- Debit: Depreciation account with depreciation amount calculated using the straight line method.
- Credit: Accumulated depreciation account with depreciation amounted calculated using the straight line method.
- Debit: Accumulated depreciation account with depreciation amount calculated using the double declining balance.
- Credit: Depreciation account with depreciation amount calculated using the double declining balance.
Impairment write-down of capital assets
In this case, the accounts can be manipulated by failing to write-down fully impaired capital assets. An investigator should review specific capital asset accounts to check for book balances over time. This will reveal if the company has fully impaired capital assets. The investigator should also check the disposal account and gain on the disposal account if the entries for write-down of the assets have been passed. Adjustment can be made by passing entries to write-down.
Difference between net income and cash flow
An investigator should look for the possibility of a change in the revenue recognition policy. The company might decide to record revenue sooner than the previous years. For instance, a company may decide to record the entire value of a three-year contract up front instead of spreading it over the years. An investigator can detect the manipulation by observing the percentage change in revenue over time. The manipulation can be detected by a sudden percentage increase in the amount of revenue. In this case, adjustments will be made by spreading the revenue from such contracts over the period of contract using methods such as percentage of completion approach. This will eliminate manipulation. The accounts that will be affected are revenue and inventory accounts.
Change in useful life of large asset
In this case, an investigator should monitor the trend of depreciation or amortization expenses for any significant changes over time. Further, an investigator should also compare the depreciation rates used by the company against the industry norms. Any deviation from the industry norm may be an indication of manipulation of the useful life of an asset. The manipulation can be detected by reviewing the depreciation expense account. A change in the amount of depreciation expense of a large asset may be as a result of a change in useful life of the asset. The manipulation can be adjusted by reversing the manipulated entries and passing correct entries with a correct useful life of the asset. The accounts that will be affected are depreciation expense, accumulated depreciation and the asset account.
Recast financial statements
Canadian Tire Corporation
Recast balance sheet.
Canadian Tire Corporation
Recast income statement.
Canadian Tire Corporation
Recasted statement of cash flow.