1. Fraud Examination, 3E Chapter 13: Liability, Asset, and Inadequate Disclosure Frauds COPYRIGHT © 2009 South-Western, a part of Cengage Learning

2. 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. 2

3. Learning Objectives List fraudulent schemes that inadequately disclose financial statement information. Explain the inadequate disclosure fraud. 3

4. Types of Financial Statement Fraud 1.Understating liabilities 2.Overstating assets 3.Inadequate disclosure 4

5. 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 5

6. Understatement of Liabilities Fraud Ways to detect understatement of liabilities Abnormal analytical symptoms Documentary symptoms 6

7. Overstatement of Assets Fraud 7 Schemes that Overstate Assets

8. 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 8

9. 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 9

10. 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 10