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

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

3. Learning Objectives
Understand 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.

4. Learning Objectives
Identify 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.

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

6. Why 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 Early
Create Fictitious Revenues
Hold Books Open 1 Year +

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

8. Discuss 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), and
Look for changes in revenue-related relationships from period to period.

9. What 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, and
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 -

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

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

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

16. NO! 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 to
determine if fraud exists.

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 don’t know who to talk to
People don’t 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. Understated Purchases
Review Effect of Overstating Inventory & Understating Purchases on Cost of Goods Sold.
Overstated
Ending Inventory
Understated Purchases
No 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
Determine
Inventory Costs
Return Goods?
Take Discount?
Count Inventory
Inventory Counted?
Pay Vendor
Sell Inventory?
Obsolete?

24. Identify Some Inventory Fraud Symptoms.
Inventory moves are very visible
Ask inventory handlers what
moves & what doesn't
Check Inventory Costs with Vendors
Talk to Large Customers

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

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

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