1. Chapter 12: Revenue- and Inventory-Related Financial Statement Frauds © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

2.  This chapter focuses on revenue-and inventory-related financial statement frauds. Specifically, it focuses on identifying financial statement fraud exposures. While doing this, it is important to focus on transactions and accounts that are affected by and correspond with the potential frauds.  This chapter also discusses fraud symptoms that may exist and how to actively search for these fraud symptoms. Finally, the chapter addresses ways to follow up on symptoms observed that pertain to both revenue-and inventory-related financial statement frauds. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

3. 1. Identify revenue-related financial statement fraud schemes. 2. List ways to search for symptoms of revenue- related financial statement fraud. 3. Understand the importance of, and ways to follow up on, revenue-related fraud symptoms. 4. Discuss inventory-related financial statement fraud schemes. 5. Identify ways to search for inventory-related financial statement fraud symptoms. 6. Explain the importance of, and ways to follow up on, inventory-related fraud symptoms. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

4. Revenue-Related Fraud Schemes (slide 1 of 3)  Two reasons for the prevalence of revenue- related financial statement fraud: ◦ The availability of acceptable alternatives for recognizing revenue ◦ The ease of manipulating net income using revenue and receivable accounts © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

5. Common Revenue-Related Fraud Schemes:  Related-party transactions  Sham sales  Bill-and-hold sales  Side agreements  Consignment sales  Channel stuffing © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

6. Common Revenue-Related Fraud Schemes:  Lapping or kiting  Redating or refreshing transactions  Liberal return policies  Partial shipment schemes  Improper cutoff  Round-tripping All of these fraud schemes result in overstated revenues and overstated net income. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

7. Identifying Revenue-Related Fraud Six Categories 1. Analytical symptoms 2. Accounting or documentary symptoms 3. Lifestyle symptoms 4. Control symptoms 5. Behavioral and verbal symptoms 6. Tips and complaints © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.

8. Is overstated= Net Income Are not affected− Expenses Is understated= Gross Margin Is understated− Cost of Goods Sold Are not affected= Net Revenues (Sales) Are not affected− Sales Discounts Are not affected− Sales Returns Are not affectedGross Revenues (Sales) WHEN INVENTORY IS OVERSTATED, THENINCOME STATEMENT

9. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part. Inventory & Cost of Goods Sold Frauds (slide 2 of 2) OverstatedUnderstated= Cost of Goods Sold Not affectedOverstated− Ending Inventory OverstatedNot affected= Goods Available for Sale Not affected − Purchase Discounts on Inventory Purchases Not affected − Returns of Inventory to Vendor Not affected + Purchases of Inventory OverstatedNot affectedBeginning Inventory PERIOD 2PERIOD 1, OVERSTATEMENT OF ENDING INVENTORYCOST OF GOODS SOLD CALCULATION

10. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part. Compare recorded amounts in the financial statements with nonfinancial statement amounts Compare financial results and trends of the company with those of similar firms in the same industry Comparing financial statement amounts or relationships with other information Look for unusual changes in inventory and cost of goods sold relationships from period to period Look for unusual changes in inventory and cost of goods sold account balances from period to period Analyzing financial balances and relationships within financial statements