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FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Revenue- and Inventory-Related Financial Statement Frauds Chapter 12.

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Presentation on theme: "FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Revenue- and Inventory-Related Financial Statement Frauds Chapter 12."— Presentation transcript:

1 FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Revenue- and Inventory-Related Financial Statement Frauds Chapter 12

2 Learning Objectives 1.Identify revenue-related financial statement fraud schemes. 2.Understand revenue-related financial statement fraud schemes. 3.Identify ways to proactively search for revenue-related financial statement fraud schemes.

3 Learning Objectives 4.Understand the importance of, and ways to follow up on, revenue-related fraud symptoms. 5.Identify inventory and cost of goods sold financial statement fraud schemes. 6.Understand inventory and cost of goods sold financial statement fraud symptoms.

4 Learning Objectives 7.Identify ways to search for inventory and cost of goods sold financial statement fraud schemes. 8.Understand the importance of, and ways to follow up on, inventory and cost of goods sold fraud symptoms.

5 List Common Ways to Commit Revenue Fraud. 1.Manipulate Revenue Accounts 2.Record Revenues Prematurely Factoid Revenue fraud is the most common fraud committed.

6 Why Are Revenue Frauds so Common? 1.GAAP (Generally Accepted Accounting Principles) allows too many alternative ways to recognize & record revenue. 2.It is an easy fraud to commit. How is it done? 1.Report Early 2.Create Fictitious Revenues 3.Hold Books Open 1 Year +

7 Typical Revenue – Related Transactions Complete the Chart Collect cash within discount period 6 Estimate uncollectible A/R 2 Sell goods & services to customers 1 Receivable Paid YES Goods Returned NO YESAccept From Customer 3 Write Off Receivables as Uncollectible 4 NO Discount Taken YES NO Collect Cash After Discount Period 5

8 Discuss What to Look For? 1.Analyze the balances & relationships within the statements. 2.Look for unusual changes in revenue- related accounts balances from period to period (looking for trends), and 3.Look for changes in revenue-related relationships from period to period.

9 What Kind of Changes Should You Look For? 4.Compare the statement amounts & relationships with other data. 5.Compare the companys financial results & trends with those of similar firms in the same industry, and 6.Compare financial statement amounts with the assets they are supposed to represent.

10 Discuss Revenue-Related Fraud Symptoms. Analytical symptoms Accounting or documentary symptoms Lifestyle symptoms Control symptoms Behavioral or verbal symptoms Tips and complaints

11 Complete this Table Analyzing Financial Balances and Relationships within Financial Statements Look for unusual changes in revenues and accounts receivable balances from period to period (trends). Look for unusual changes in revenue-cycle- account relationships from period to period. Comparing Financial Statement Accounts or Relationships with Nonfinancial Statement Information Compare financial results and trends of the company with those of similar firms in the same industry. Compare recorded amounts in the financial statements with nonfinancial statement amounts

12 What is the Formula for Measuring Period to Period Changes? Period 1 account balance Period 2 account balance Period 1 account balance -

13 Make the Balance Sheet & Income Statement into Change Statements HOW? Perform Horizontal & Vertical Analysis Compare to Statements of Changes in Cash Circle the Preferred What is an Alternative to the Prior Formula?

14 Match Ratio to Name. Sales Returns Total Sales Gross Profit Net Sales A/R Turnover 365 Net Sales A/R Gross Profit Margin Sales Return % A/R Turnover Sales Discount % Number of Days in A/R Sales Discounts Gross Sales

15 Match Ratio to Explanation. A measure of profitability Estimated uncollectible A/R, a contra-asset, Expense for revenues or receivable presumed uncollectible Financial statements converted to % Allowance for Uncollectible Accounts Bad Debt Expense Common Size Financial Statements Earnings per Share

16 Do Ratio, Vertical or Horizontal Analysis Tell if Fraud Has Been Committed?

17 List Other Investigative Procedures You Could Perform. Compare to companies in same industry Compare F/S to actual assets Search for internal control weaknesses Leads to Opportunity

18 Comment on Behavior & Lifestyle Flags. Enhanced Performance Revenue Fraud Indirect Benefit to Perpetrators Questions and Observation

19 Discuss TIPS. Ombudsman or Hotline People dont know who to talk to People dont want to wrongfully accuse someone else Whistleblower repercussions People feel they have suspicions, not knowledge

20 Explain How Inventory & Cost of Goods Sold Are Manipulated to Commit Fraud. Overstating Inventory Increases Net Income Because Cost of Goods Sold Decreases

21 Review Effect of Overstating Inventory on a Simplified Income Statement. Gross Revenues (Sales) -Sales Returns -Sales Discounts Net Revenues (Sales) -Cost of Goods Sold Gross Margin -Expenses Net Income Understated Overstated

22 Review Effect of Overstating Inventory & Understating Purchases on Cost of Goods Sold. Overstated Ending Inventory Understated Purchases No Effect Understated No Effect Understated OverstatedNo Effect Understated Beginning Inventory +Purchases -Returns to Vendor -Purchase Discounts on Inventory Goods Available for Sale -Ending Inventory Cost of Goods sold

23 Complete Inventory Cycle. Purchase Inventory Return Goods? Take Discount? Pay Vendor Sell Inventory? Obsolete? Inventory Counted? Count Inventory Determine Inventory Costs

24 Identify Some Inventory Fraud Symptoms.

25 Complete Chart. Inventory Relationships 1.Examine Changes in Relevant Ratios 2.Use Vertical Analysis Inventory Account Balances 1.Focus on Changes in Statement Numbers 2.Study Statement of Cash Flow 3.Use Horizontal Analysis With Real-World Numbers 1.Compare Statement Amounts with the Assets They Are Supposed to Represent With Industry Competitors 1.Compare Statement Results with Similar Companies 2.Compare Companys trends with those of similar companies Analysis of Period-to-Period Changes Analysis of Period-to-Period Changes

26 Discuss Inventory Fraud Symptoms. Analytical symptoms Accounting or documentary symptoms Lifestyle symptoms Control symptoms Behavioral or verbal symptoms Tips and complaints

27 Match Ratio to Name. Financial statements converted to % The expense of goods sold to customers Expensing estimated uncollectible A/R or revenues A contra receivable, estimated uncollectible A/R Allowance for Doubtful Accounts Bad Debt Expense Cost of Goods Sold Common-Size Financial Statements

28 Match Ratio to Name. Sales returned by customer for refund Determining when revenues are earned & can be reported on the income statement A measure of profitability Earnings Per Share Revenue Recognition Sales Returns


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