The Leslie Fay Companies Essay Example

The Leslie Fay Companies still relied on phone sales (2). Michael C. Knapp also notes this fact.

According to the book "Contemporary Auditing" by Knapp, in the late 1980s, Leslie Fay acquired several companies, taking over their assets, trademarks, and some liabilities (65). The article "The Leslie Fay Company, Inc. - Company History" discusses John Pomerantz's success in persuading numerous retailers to sell Leslie Fay's merchandise, despite the high prices that were hindering their sales during that time (2). Criticism was directed towards Leslie Fay for their expensive and outdated merchandise, which led to necessary changes. Department stores reduced their orders from Leslie Fay due to their inability to sell the products.

Due to a lack of merchandise sales, Leslie Fay had to drastically reduce prices and discontinue some clothing styles and labels. However, they still managed to achieve high sales and profits, resulting in generous bonuses for Pomerantz and other associates. However, it was soon discovered in late January 1993 that the company had manipulated their books to show higher profits. Between 1990 and 1992, profits reached $81 million (p 3-4). Knowing who Leslie Fay conducted business with and considering the recession during the late 1980s and early 1990s, further investigation is warranted to understand how they achieved such high profits during this period. According to Michael C. Knapp's Contemporary Auditing, a Standard Unqualified Audit Report should include all financial statements (48).

During the audit, it was observed that the auditor only utilized the Consolidated Balance Sheet and Consolidated Income Statement. These financial statements present an overview of all the companies combined, rather than the individual company. To conduct a thorough audit, it would be necessary to

acquire the Balance Sheets and Income Statements from 1987-1991 of all the companies merged in the Consolidated Balance Sheet and the Consolidated Income Statement. As The Leslie Fay Companies is a manufacturer, the Balance Sheet should encompass Raw Materials, Work in Process, and Finished Goods. The Income Statement should indicate the Cost of Goods Sold, Cost of Goods Available for Sale, manufacturing costs, and both starting and ending Inventory figures in order to calculate the Gross Margin.

Then, you subtract the rest of the expenses to get a complete view of the company's inventory going in and out, as well as any costs associated with it. This prevents understating or overstating inventory. The company should also have a Schedule of the Cost of Goods Manufactured, which indicates where the costs for manufactured goods on the Income Statement came from. By analyzing the original Balance Sheet and Income Statement, I can compare the actual number of dresses manufactured and their respective costs. Another important aspect to consider in the Income Statement is the section on Discontinued Operations. This section highlights any losses from department stores that closed down and any gains from companies acquired by Leslie Fay during this period.

In the past, Leslie Fay acquired and lost multiple department stores, resulting in the need for the Discontinued Operations section to account for any uncollectible receivables. Knapp's research revealed that in late 1989, Leslie Fay suffered a significant loss from a receivable owed by Allied/Federated Department Stores, which had filed for bankruptcy (65). This loss would be reflected in the Discontinued Operations section. Auditing and Assurance Services explains that audits are divided into cycles for easier management. Beginning

with the sales and collection cycle, I would examine the General Ledger and Journal entries, starting with the cash account, which serves as a crucial link between various cycles (p 148-149). It is also essential to verify the total amount of accounts receivables listed in the master list matches that on the Balance Sheet.

It is common knowledge that fraud can be concealed through the use of Accounts Receivables. In order to confirm the amount of cash in the bank, the cash receipts journal should be consulted. To track the shipment of goods to both Leslie Fay and other department stores, it is necessary to gather shipping records. The Sales Return and Allowance account in the general ledger provides information on returned merchandise, and verification can be obtained from a credit memo issued to the company returning the items.

It is hoped that there exist written customer orders taken via phone calls by Leslie Fay's employees. Since Leslie Fay does not possess a computer, there should be written evidence concerning sales, such as an invoice that can be used to confirm the merchandise sold. By acquiring the Sales Journal, it would become possible to trace each customer by name, the date of purchase, and the transaction amount. Additionally, when it comes to stores that failed to make their payments to Leslie Fay, it would be necessary to search for any uncollectible debt accounts.

I would examine any form of documentation related to merchandise sales and inventory purchases. Additionally, I would focus on the cycle of acquiring capital and repaying it. In this aspect, I would review the amounts recorded in the Cash Disbursements journal, which include payments for

bills such as supplies, dividends, long-term debts, and other financial responsibilities of the company. The Acquisitions journal can provide confirmation of the expenses on raw materials purchased by Leslie Fay, as well as overhead costs and inventory acquisitions. Considering the decline in Leslie Fay's apparel sales, there may be a need for an inventory write-off, which I would also investigate. Lastly, I would collect any relevant journal entries from the Payroll journal to confirm wages paid to employees.

One way to verify the amounts in the General journal is to also look at another journal account, such as the General journal. This will help confirm any allocations and adjustments for depreciation on equipment made by the company. Once the accounts mentioned above have been examined, the next step is to obtain the Trial Balance of Leslie Fay. This will allow for the reconciliation of balances in the journal accounts, as the Trial Balance includes entries from both the General Ledger and Journal. Additionally, the Statement of Cash Flows is another important financial statement to consider. It consists of three parts: Cash Operations, Cash Investments, and Cash Financing. The Operations section helps verify journal transactions related to Accounts Receivables and Inventory. It is important for the total amount of Accounts Receivables to match with the Statement of Cash Flows.

The Statement of Cash Flows can be used to verify the total amount of Inventory. The Cash Investments section of the Statement of Cash Flows includes any investments made by Leslie Fay, as well as any gains from proceeds received. The Cash Financing section deals with stock issuance, dividends paid out to investors, and loans taken out by the

company. By gathering all of this information, I am prepared to conduct the audit and assess the fairness of the financial statements.

According to Arens, Elder, and Beasley (Works Cited), I am confident that this statement is correct. This is because each transaction plays a crucial role in ensuring the accuracy of the financial statements. It allows me to verify and validate the amounts stated in the journal entries.

Auditing and Assurance Services, 13th edition, published by Pearson Education, Inc. in 2010.

Print. Knapp, Michael C. “The Leslie Fay Companies." Contemporary Auditing: Real Issues and Cases: 7th Edition. Mason, Ohio: South-Western Cengage Learning, 2009. 63-73.

Print. "The Leslie Fay Company, Inc. - Company History." Find Funding with Banks, Investors, and Other Funding Sources | Funding Universe. 1-6. Web.

06 Nov. 2011.