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

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.

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.

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.

List Common Ways to Commit Revenue Fraud.

Why Are Revenue Frauds so Common? How is it done?

Typical Revenue – Related Transactions Complete the Chart

Discuss What to Look For.

What Kind of Changes Should You Look For?

Discuss Revenue-Related Fraud Symptoms.

Complete this Table Analyzing Financial Balances and Relationships within Financial Statements Comparing Financial Statement Accounts or Relationships with Nonfinancial Statement Information

What is the Formula for Measuring Period to Period Changes?

Make the Balance Sheet & Income Statement into Change Statements HOW? Circle the Preferred What is an Alternative to the Prior Formula?

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

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

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

List Other Investigative Procedures You Could Perform.

Comment on Behavior & Lifestyle Flags.

Discuss TIPS.

Explain How Inventory & Cost of Goods Sold Are Manipulated to Commit Fraud.

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

Review Effect of Overstating Inventory & Understating Purchases on Cost of Goods Sold. Overstated Ending Inventory Understated Purchases Beginning Inventory +Purchases -Returns to Vendor -Purchase Discounts on Inventory Goods Available for Sale -Ending Inventory Cost of Goods sold

Complete Inventory Cycle.

Identify Some Inventory Fraud Symptoms.

Complete Chart. Inventory Relationships Inventory Account Balances With Real-World Numbers With Industry Competitors Analysis of Period-to-Period Changes Analysis of Period-to-Period Changes

Discuss Inventory Fraud Symptoms.

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

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