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Hi I came across this adjustment and find it confusing
In March 2012, Fresco’s internal audit department discovered a fraud committed by the company’s credit controller who did not return from a foreign business trip. The outcome of the fraud is that $4 million of the company’s trade receivables have been stolen by the credit controller and are not recoverable. Of this amount, $1 million relates to the year ended 31 March 2011 and the remainder to the current year. Fresco is not insured against this fraud
In the statement of comprehensive income, 3000 has been added to administrative expenses and I don’t understand why. First of all if its a fraud i-e the money company has lost then why are we adding it? and secondly why admin exp?
Thanks a lot.
“First of all if its a fraud i-e the money company has lost then why are we adding it?” – we’re back to double entry principles again!
Clearly we have to reduce the Receivables amount by $4 million … so, credit Receivables
Where do you want to put the debit? It has to go somewhere! So, what’s your suggestion?
You ask “Why are we adding it?” It’s being added to an expense to make the expense bigger and that has the effect of reducing profits
Why administrative expenses? – that’s a fair-enough question. However, where else would you include this $3 million? Cost of sales? Distribution costs? Finance costs? As a negative in Investment Income?
Please tell me – which other category would most appropriately include this $4 million.
In practice, there would be a full disclosure note made in the notes to the financial statements transparently explaining the circumstances behind this $4 million adjustment that has proved to be necessary.
This is not only necessary for the purposes of giving stakeholders full information. It is also necessary because the comparative figures will need to be adjusted (last year’s administrative expenses, retained earnings and receivables will all need to be restated)
OK?
“Well cost of sales seems appropriate for adding fraud” – not really. Cost of sales is an integral part of the calculation of gross profit and profit percentage is itself a key ratio calculated and interpreted by users of financial statements
To include the cost of fraud within cost of sales would be a major distortion
After all, cost of sales is reckoned to be the cost of ……SALES! Not the cost of sales plus the cost of fraud
OK?
why are we only adding 3 million to the admin expenses and not the whole amount i.e. 4 million since the fraud was only discovered this year?
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