Case 4.6 Phar-Mor, Inc.

6. A) Other high profile cases where a company has committed fraud by misstating inventory include Comptronix Corporation and Bristol-Meyers Squibb Company.
B) It is particularly difficult to detect intentional misstatements of inventory because manual checks of inventory only occur semi-annually, management’s ability to alter these checks, and the cheer ability to miscount items due to sheer volume. Phar-Mor was capable of misleading their external auditors because the auditors of a retail store are not required to physically examine the inventory in each store. The auditing firm only examined inventory in four of the one hundred and twenty nine stores that existed. Phar-Mor also knew in advance which locations were going to be audited which allowed them to be able to fool Coopers & Lybrand for several years.
C) Audit procedures such as implementing additional random visits to Phar-Mor stores to examine inventory, verifying shipments from suppliers and conducting an inquiry of individual store management could have helped prevent or detect the overstatement of inventory.

7. A) Factors that would have contributed to a high inherent risk assessment of Phar-Mor include their excessive growth in a highly competitive market, the motivation from management to maintain that growth, rapid expansion, results from previous audits, their involvement with related parties, inventory being their biggest account, and the random, flamboyant behavior of Phar-Mor’s founder and chief operating officer. B) Auditor’s have equal responsibility for detecting material misstatements due to errors and fraud. The auditing team works together to make sure that checks are in place so that everyone’s work is thoroughly examined. However, all things cannot be discovered due to limitations on time and sample size. C) Several red flags existed within