Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fraud Examination Chapter 13 Liability, Asset, and Inadequate Disclosure Frauds

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. To the Student  This chapter concludes our discussion on financial statement fraud by covering several other types of financial statement frauds, including understating liabilities, overstating assets, and inadequate disclosures. In dealing with these frauds, we look at how to identify fraud exposures and to actively search for and detect fraud symptoms.  While not as common as revenue or inventory-related frauds, they can be just as significant, as is illustrated in the Waste Management, Inc., fraud.

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives  Identify fraudulent schemes that understate liabilities.  Discuss the understatement of liabilities fraud.  Describe fraudulent schemes that overstate assets.  Understand the overstatement of assets fraud.  List fraudulent schemes that inadequately disclose financial statement information.  Explain the inadequate disclosure fraud.

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Financial Statement Fraud 1.Understating liabilities 2.Overstating assets 3.Inadequate disclosure Why might liabilities be understated if proper adjusting entries are not made at the end of an accounting period?

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Understatement of Liabilities Fraud Schemes that understate liabilities  Understating accounts payable  Understating Accrued Liabilities  Recognizing Unearned Revenue as Earned Revenue  Underrecording Future Obligations  Not Recording or Underrecording Various Types or Debt (Notes, Mortgages, etc.)  Omission of Contingent Liabilities

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Understatement of Liabilities Fraud Ways to detect understatement of liabilities  Abnormal analytical symptoms  Reported accounts payable balances that appear too low  Purchase or cost of goods sold numbers that appear too low or purchase returns or discounts that appear too high  Documentary symptoms  Involve such things vendor invoices that have been received but no liability is recorded  Can relate to specific accounts, for example payroll might include employee with no withholdings

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Overstatement of Assets Fraud

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Overstatement of Assets Fraud  Ways to detect overstatement of assets  Compare changes and trends in financial statement account balances  Compare changes and trends in financial statement relationships  Compare financial statement balances with nonfinancial information or things, such as the assets they represent  Compare financial statement balances and policies with those used by other similar companies

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Inadequate Disclosure Fraud Disclosure Fraud Schemes  Misrepresentation about the nature of the company or its products  Misrepresentations or omissions in the MD&A  Misrepresentations or omissions in the footnotes to the financial statements

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Inadequate Disclosure Fraud Ways to identify Disclosure Fraud  Look for inconsistencies between disclosures and information in the financial statements  Inquire of management concerning related-party transactions, contingent liabilities, and contractual obligations  Review a company’s files and records with the SEC and other regulatory agencies