1. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-1 Today’s Topics n Revenue Frauds n Inventory Frauds n Liability Frauds n Other Asset Frauds n Disclosure Frauds

2. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-2 The 7 Shenanigans- Revisited n Premature recording of revenue n Bogus revenue n One time “recurring” gains n Shifting current expenses n Unrecorded liabilities n Revenue shifting n Shifting future expenses

3. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-3 General Detection Model n Period to period account balance analysis n Period to period relationship analysis n Comparison with industry averages n Comparison with physical assets n General horizontal and vertical analysis

4. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-4 Revenue Frauds n Shenanigans #1 and #2 n Table pps. 408-409 n Revenue cycle n Sell goods or services n Estimate collectibility n Returns n Write-offs n Collect cash

5. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-5 Revenue Fraud Detection n Detection n Accounting anomilies n Ratios (p.410)

6. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-6 Inventory Frauds n Shenanigan #4 n Table p. 420 n Inventory cycle n Purchase inventory n Returns n Payment n Sell inventory n Write offs n Estimate or count inventory n Value inventory

7. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-7 Inventory Fraud Detection n Detection n Statement of cash flows n Comparison with physical assets n Ratios (p.421)

8. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-8 Liability Fraud n Shenanigan #5 n Table p. 442 n Liability cycle n Purchase goods and services n Incur accruals n Sell goods and services n Borrow money n Payments on account n Assess contingencies

9. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-9 Liability Fraud Detection n Types n Understatement n Unearned revenue n Omission of debt and contingencies n Detection n Accounting anomilies n Ratios (p.449)

10. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-10 Other Asset Fraud n Shenanigan #4 n Types n Overstatement n Improper capitalization n Understated write offs

11. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-11 Other Asset Fraud Detection n Detection n Accounting anomilies n Ratios (p.458; p.463)

12. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-12 Inadequate Disclosure Fraud n Misrepresentation n Company and its products n Via financial reports n Via footnote disclosures

13. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-13 Disclosure Fraud Detection n Detection n KTT n Questions on p.468 n Use common sense n Compare footnotes n Vigorous use of inquiries n Go outside the box! n Fraud Buster Ratio n (NI - CFO)/Total Assets; should approach zero n Condition worsens as result grows

14. FORENSIC ACCOUNTING - BA124 – Fall 2008Slide 11-14 Financial Fraud Detection n KTT is the key n Use the Fraud Exposure Rectangle n Management & Directors n Background, motivation & influence n Company relationships n Obligations, related party transactions & compliance n Nature of organization & industry n Financial results & operations n GAAP, attitude