Compute and interpret the common-size analysis for the income statement and balance sheet for each year provided.

Learning Goal: I’m working on a business report and need an explanation and answer to help me learn.

OPTION #1: SECURITIES FRAUD INVESTIGATION

Review the following Excel spreadsheet containing the financial statements of Cloudy Company, Inc., a publicly traded company. The financial statements are adapted from a company that was involved in securities fraud. The alleged perpetrator of the fraud was the founder/Chief Executive Officer (CEO) of the company.

• Cloud Company, Inc. Financial StatementsDownload Cloud Company, Inc. Financial Statements

Leading up to the fraud allegation, the company had been in existence for a few years. Hence, the attached financial statements include: income statements for years ended 4, 5, and 6; balance sheets or years 5 and 6; and a statement of cash flows for year ended 6.

You’ve been hired as the forensic accountant to investigate whether or not fraud has occurred, and if so, the extent of the fraud. Use the financial statements and information provided in the instructions below to create a detailed fraud investigation report by responding to the following questions/topics:

1. Compute and interpret the common-size analysis for the income statement and balance sheet for each year provided.
2. Compute and interpret the trend analysis for the income statement and balance sheet for each year provided.
   1. Compute the cash flows analysis; that is, indicate the major uses and sources of cash, and the relationship of net income to accruals.
   2. What are some of the possible questions raised by the cash flows analysis?
   3. Which items on the cash flows analysis would you investigate further and why?
3. Compute and interpret the ratios analyses for years 4, 5, and 6 for the income statements; for years 5 and 6 for the balance sheets; and for year 6 for the statement of cash flows. The ratios must include at least the following:
   1. Liquidity (current and net working capital)
   2. Profitability (gross margin, return on sales, return on assets, and return on equity)
   3. Efficiency (total assets turnover, accounts receivable turnover, and accounts receivable days)
   4. Leverage (debt to assets, equity to assets, debt to equity, and equity multiplier)
4. What do the above analyses indicate about the relationships between the income statements and balance sheets?
5. Based on your understanding of the financial data, which areas of each financial statement need further attention? Be sure to provide rationale and support for your assertions.
6. CPA firms audited the attached financial statements; a local CPA firm audited years 4 and 5, while an out-of-state CPA firm audited year 6. Although year 7 statements were not provided to you, one of the big CPA firms reviewed the interim financial statements for year 7. Discuss the following about the audits and reviews:
   1. The nature of assurances on the financial statements.
   2. Accounting principles and concepts violated by Cloudy Company.
   3. The context of the financial statements’ presentation. Who were the primary users of the financial statements?

In addition to the financial statements provided, indicate what other evidence you will use in the course of your investigation. In addition to the CEO, who is the primary suspect, which organizational positions will you interview and in what order you will conduct the interviews? Examples of such positions or representatives include the accountant, Chief Financial Officer (CFO), clerks, and secretary.

Your 8- to 10-page report must be accurate, clear, and detailed. You must include a summary of your findings and support the summary with answers to the above questions. You must cite at least six credible sources to support your points.