3Learning ObjectivesUnderstand the importance of, and ways to follow up on, revenue-related fraud symptoms.Identify inventory and cost of goods sold financial statement fraud schemes.Understand inventory and cost of goods sold financial statement fraud symptoms.
4Learning ObjectivesIdentify ways to search for inventory and cost of goods sold financial statement fraud schemes.Understand the importance of, and ways to follow up on, inventory and cost of goods sold fraud symptoms.
5List Common Ways to Commit Revenue Fraud. FactoidRevenue fraud is the most common fraud committed.Manipulate Revenue AccountsRecord Revenues Prematurely
6Why Are Revenue Frauds so Common? GAAP (Generally Accepted Accounting Principles) allows too many alternative ways to recognize & record revenue.It is an easy fraud to commit.How is it done?Report EarlyCreate Fictitious RevenuesHold Books Open 1 Year +
7Complete the Chart 1 2 3 4 5 6 Typical Revenue – Related Transactions Sell goods & services to customers1Estimate uncollectible A/R2YESAcceptFromCustomer3Goods ReturnedNOWrite Off Receivablesas Uncollectible4NOReceivable PaidYESDiscount TakenYESNOCollect Cash After Discount Period5Collect cash within discount period6
8Discuss What to Look For? Analyze the balances & relationships within the statements.Look for unusual changes in revenue- related accounts balances from period to period (looking for trends), andLook for changes in revenue-related relationships from period to period.
9What Kind of Changes Should You Look For? Compare the statement amounts & relationships with other data.Compare the company’s financial results & trends with those of similar firms in the same industry, andCompare financial statement amounts with the assets they are supposed to represent.
10Discuss Revenue-Related Fraud Symptoms. Analytical symptomsAccounting or documentary symptomsLifestyle symptomsControl symptomsBehavioral or verbal symptomsTips and complaints
11Complete this TableAnalyzing Financial Balances and Relationships within Financial StatementsLook 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 InformationCompare 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
12What is the Formula for Measuring Period to Period Changes? Period 1 account balancePeriod 2account balancePeriod 1-
13What is an Alternative to the Prior Formula? Make the Balance Sheet & Income Statement into Change Statements HOW?Perform Horizontal & Vertical AnalysisCompare to Statements of Changes in CashCircle the Preferred
14Match Ratio to Name. Gross Profit Margin Sales Returns Total Sales Net SalesSales Return %Net SalesA/RSales Discount %A/R Turnover365A/R TurnoverNumber of Days in A/RSales DiscountsGross Sales
15Match Ratio to Explanation. A measure of profitabilityAllowance for Uncollectible AccountsEstimated uncollectible A/R, a contra-asset,Bad Debt ExpenseCommon Size Financial StatementsFinancial statements converted to %Expense for revenues or receivable presumed uncollectibleEarnings per Share
16NO! They provide symptoms. You must investigate to Do Ratio, Vertical or Horizontal Analysis Tell if Fraud Has Been Committed?NO! They provide symptoms.You must investigate todetermine if fraud exists.
17List Other Investigative Procedures You Could Perform. Compare to companies in same industryCompare F/S to actual assetsSearch for internal control weaknessesLeads to Opportunity
18Comment on Behavior & Lifestyle Flags. Enhanced PerformanceRevenue FraudIndirect Benefit to PerpetratorsQuestions and Observation??
19Discuss TIPS. Ombudsman or Hotline People don’t know who to talk to People don’t want to wrongfully accuse someone elseWhistleblower repercussionsPeople feel they have suspicions, not knowledge
20Explain How Inventory & Cost of Goods Sold Are Manipulated to Commit Fraud. Overstating Inventory Increases Net Income Because Cost of Goods Sold Decreases
21Review Effect of Overstating Inventory on a Simplified Income Statement. Gross Revenues (Sales)-Sales Returns-Sales DiscountsNet Revenues (Sales)-Cost of Goods SoldGross Margin-ExpensesNet IncomeUnderstatedOverstated
22Understated Purchases Review Effect of Overstating Inventory & Understating Purchases on Cost of Goods Sold.OverstatedEnding InventoryUnderstated PurchasesNo EffectUnderstatedBeginning Inventory+Purchases-Returns to Vendor-Purchase Discounts on InventoryGoods Available for Sale-Ending InventoryCost of Goods sold
24Identify Some Inventory Fraud Symptoms. Inventory moves are very visibleAsk inventory handlers whatmoves & what doesn'tCheck Inventory Costs with VendorsTalk to Large Customers
25Period-to-Period Changes Complete Chart.Analysis ofPeriod-to-Period ChangesInventory Account BalancesFocus on Changes in Statement NumbersStudy Statement of Cash FlowUse Horizontal AnalysisWith Industry CompetitorsCompare Statement Results with Similar CompaniesCompare Company’s trends with those of similar companiesInventory RelationshipsExamine Changes in Relevant RatiosUse Vertical AnalysisWith Real-World NumbersCompare Statement Amounts with the Assets They Are Supposed to Represent
26Discuss Inventory Fraud Symptoms. Analytical symptomsAccounting or documentary symptomsLifestyle symptomsControl symptomsBehavioral or verbal symptomsTips and complaints
27Match Ratio to Name. Allowance for Doubtful Accounts Financial statements converted to %The expense of goods sold to customersBad Debt ExpenseA contra receivable, estimated uncollectible A/RCost of Goods SoldCommon-Size Financial StatementsExpensing estimated uncollectible A/R or revenues
28Match Ratio to Name. Earnings Per Share Sales returned by customer for refundDetermining when revenues are earned & can be reported on the income statementRevenue RecognitionSales ReturnsA measure of profitability