AUDIT CASES

(In order to accomplishe Seminar Audit assignment)

Lulu Puspita Damayanti

8335123546

Martika Raisa

8335123549

S1 Accounting Reguler B 2012

FACULTY OF ECONOMICS
STATE UNIVERSITY OF JAKARTA
2015

HAPPINESS EXPRESS, INC

1. Background
Happiness Express, Inc was a toy company founded by brothers Isaac and Joseph
Sutton in 1989. Joseph became the CEO, and Isaac became the companys chief operating
officer (COO). The Suttons business model involved identifying trendy characters
introduced to children in the US by television programs, major movies, books, and other
publications. The brothers then purchased merchandise licensing rights for those charac
ters from Disney, Nickelodeon, and etc. Licensed merchandise manufactured by
Happiness Express included plastic figurines, stuffed dolls, shoelaces, battery operated
toothbrushes, night-lights, and various school supplies. Then marketed its merchandise to
FAO Schwartz, Wal-Mart, and other major retailers.
2. Description Case
a. Introduction
The Little Mermaid and Barney, were two of the earliest characters for which the
Suttons obtained licensing rights and the sales is so impressive. To acquire the capital
needed to expand the companys operations, the Suttons took Happiness Express public
in July 1994 with an initial public offering (IPO). Within a few months, the companys
stock price nearly doubled from its initial selling price of $ 10. In the spring of 1995,
Bussiness Week named Happiness Express the #1 Hot Growth Company in the US.
According to Business Week, over the previous three years Happiness Express had
realized annual growth rates in sales, profits, and return on capital of 112 percent, 439
percent, and 68 percent, respectively.
For fiscal 1994, merchandise linked to Barney accounted for approximately 55
percent of Happiness Expresss total revenues. But in 1995, sales of Barney was
decline. Fortunately, the Mighty Morphin Power Rangers stepped into the vacuum
created by the sudden decline in childrens affection for Barney-or, at least, Barneyrelated merchandise. For fiscal 1995, Power Rangers merchandise produce 75% of
Happinesss Revenues.

b. Trouble in Happiness Express

In the spring of 1995, shortly before the close of 1995 fiscal year, a Wall Street
investment firm projected a precipitous drop in the companys earnings during fiscal
1996. The firm predicated that declining interest in Power Ranger. But Donaldson,
Lufkin & Jenrette (DLJ) a prominent Wall Street firm forecast that the revenue and
profit of company will increase during fiscal 1996.
To support this second forecast, Sutton revealed this his firms backlog of toy
orders in the spring of 1995 was nearly three time larger than the companys backlog 12
months earlier. While admitting that sales of Power Ranger merchandise would likely
decline in fiscal 1996, but he believe that the companys new products would more than
make up for those lost sales. Bolstering Suttons point of view regarding his companys
future were the record operating result that happiness Express reported in the late spring
of 1995 for the fiscal year ended March 31, 1995. The company net income for fiscal
1995 of $3.7 million was nearly double the figure reported that previous year, while its
1995 revenues rose to $60 million, a 50 percent increase over the previous 12 months.
Approximately one-half of the latter increase was attributable to Happiness Expresss
fourth-quarter sales. During the fourth quarter of fiscal 1994, the company reported
sales of $2.3 million, that figure was dwarfed by the $12.8 million of sales the company
reported for the fourth-quarter of fiscal 1995.
By the fall of 1995, sales of Power Ranger merchandise had fallen off drastically.
Then Budgie the Little Helicopter failed to capture the imagination of children in the
United States. In early September 1995, the price of Happiness Express common stock
plunged when Joseph Sutton publicly admitted that DLJs earnings forecast for fiscal
1996 had been too optimistic.
The day following that announcement, the company was rocked by the filing of a
large class-action lawsuit that named Happiness Express and its key officers as
defendants. The lawsuit charged that Happiness Express previous financial statements
had been distorted by fraudulent misrepresentations and that certain company
executives had engaged in insider trading As those executive were touting the
company promising prospects earlier in the year they were allegedly selling large
blocks of the companys stock that they owned.
At the end of fiscal 1996 Happiness Express sales continued to sag, which caused
management to issue an earnings release indicating that the companys would report a
loss of $14 to $17 million for the year. That news sent the companys stock price

plummeting to less than $2 per share. A few days later, SEC investigating and Coopers
& Lybrand withdrew the audit opinion. On september 25, the companys board of
director filed for bankruptcy and fired Isaac Sutton, and Joseph Sutton resigned as
CEO. In may 1999, the SEC filed a criminal complaint against Joseph Sutton, Isaac
Sutton, and Happiness Expresss former chief financial officer (CFO), Michael
Goldberg. The complaint also named Gold Bergs close friend and Gold Bergs former
landlord as defendants.
The SEC charged the Suttons and Goldberg with inflating Happiness Expresss
sales and net income for fiscal 1995 and 1996. For fiscal 1995, the SEC revealed that
the company had actually incurred a net loss of $ 1 million rather than the $ 7,5 million
net income it had reported. Happiness Expresss executives had apparently booked
phony sales and receivables to conceal the companys deteriorating financial condition
and operating results from Wall Street analysts, investors, and other parties.
The SEC alleged that Michael Goldberg had sold Happiness Express common
stock during 1995 before the fraudulent scheme was revealed, allowing him to earn
illicit trading profits of approximately $310.000. he also shared with his close friend
and landlord the actual status of company. The close friend earned profits from short
sales and landlord quickly sold all of his share.
c. Lawsuit
Coopers & Lybrand was the principal target of the multimillion-dollar, class
action lawsuit filed by Happiness Expresss stockholders in the fall of 1995. The reason
why that accounting public firm sued, because :
1) They have recklessly audited Happiness Expresss financial statements for fiscal
1995, which prevented the firm from uncovering millions of dollars of bogus sales
and corresponding receivables in the companys accounting records. There were $ 6
million of the bogus revenues involved fictitious sales to Wow Wee International,
Ltd. and West Coast Liquidators that had been book by Happiness Expresss
accounting staff near the end of fiscal 1995.
2) The audit team had failed to understanding of Happiness Expresss operations and
internal controls and, as a result, failed to properly plan the 1995 audit. The audit
team wasnt pay attention about significant change in the nature of Happiness
Expresss Account receivable between the end of 1994 and the end of 1995 that audit

team . Historically, the company had factored most of its account receivable to
reduced the credit risk that company faced on its outstanding receivables. At the end
of fiscal 1994, 88% of receivables were factored, but the end of fiscal 1995, only
19% of its receivables were factored.
3) There was large receivables from Wow Wee and West Coast Liquidators that resulted
from credit sales recorded by Happiness Express in final month fiscal 1995, even
booked $ 2,4 million of fictitious sales to Wow Wee on the final day. Unusually large
increases in year-end sales to a single or a few customers is an indicator of the risk
of potential material misstatements in financial statements.
4) The auditor didnt ask client about there wasnt Woo Wee in a report listing the
companys Top 25 customers for the period April 1, 1994 March 31, 1995.
Besides $3,2 million of sales allegedly made to Wow Wee during fiscal 1995 should
have placed that company among Happiness Expresss five largest customers. In
addition, the auditor should have doubted the integrity of any credit sales made to
Wow Wee since that company was a toy manufacturer and one of Happiness
Expresss largest suppliers.
5) In the performance of the sales cutoff test, Coopers purportedly examined invoices
and bills of lading associated with approximately $ 2,4 million of approximately $
3,2 million of phony Wow Wee sales. However, the invoices and bills of lading
purportedly examined by Coopers in the performance of this test were highly
suspicious like none of these Woo Wee invoices contained customer purchase order
numbers. In addition, at least one of the three bills of lading associated with the
fictitious Wow Wee sales puportedly examined by Coopers in the performance of the
sales cutoff test was, illogically, purportedly signed by the shipping companys
representative on March 29, 1995, two days prior to the date of the bill of lading.
Obviously, it would have been impossible for someone to sign a bill of lading before
it was generated. Yet, Coopers did not question the legitimacy of the bill of lading.
6) Coopers & Lybrand mailed account receivable confirmations to selected customers
of Happiness Express at the end of fiscal 1995 and the one is Wow Wee. Goldberg
provided an incorrect address for Wow Wee then forged a confirmation and had it
faxed to Coopers & Lybrand. The auditors apparently accepted the confirmation
without performing any follow-up procedures.

7) The auditors didnt selected West Coast Liquidators, besides 13% of Happiness

Expresss AR is WCL. In addition, Coopers & Lybrandss sales cutoff test did not
include any of the bogus sales to West Coast Liquidators during the final month of
fiscal 1995. In fact, if Coopers performed procedure of examining companys
invoice associated with the year-end receivables from West Coast Liquidators, it
would have discovered that they also were highly suspicious on their face. For
example, such invoices representing $ 1.346.598 of purported sales to West Coast
Liquidators did not contain any bills of lading or purchase order numbers.