1. Fraud Examination, 3E Chapter 12: Revenue- and Inventory-Related Financial Statement Frauds COPYRIGHT © 2009 South-Western, a part of Cengage Learning

2. Learning Objectives Identify revenue-related financial statement fraud schemes List ways to proactively search for revenue- related financial statement fraud symptoms. Understand the importance of, and ways to follow up on, revenue-related fraud symptoms. Discuss inventory-related financial statement fraud schemes. 2

3. Learning Objectives Identify ways to search for inventory- related financial statement fraud symptoms. Explain the importance of, and ways to follow up on, inventory-related fraud symptoms. 3

4. Revenue-Related Fraud Schemes Two reasons for the prevalence of revenue- related financial statement fraud: 1.The availability of acceptable alternatives for recognizing revenue 2.The ease of manipulating net income using revenue and receivable accounts 4

5. Revenue-Related Fraud Schemes Common Revenue-related Fraud Schemes: Related-party transactions Sham sales Bill-and-hold sales Side agreements Consignment sales Channel stuffing Lapping or kiting 5

6. Revenue-Related Fraud Schemes Common Revenue-related Fraud Schemes: Redating or refreshing transactions Liberal return policies Partial shipment schemes Improper cutoff Round-tripping 6

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 7

8. Inventory & Cost of Goods Sold Frauds The Effects of Inventory Overstatement on the Income Statement 8 Income Statement When inventory is overstated, then… Gross Revenue (Sales)Are not affected Sales ReturnsAre not affected Sales DiscountsAre not affected Net Revenues (Sales)Are not affected Cost of Goods SoldIs understated Gross MarginIs overstated ExpensesAre not affected Net IncomeIs overstated

9. Inventory & Cost of Goods Sold Frauds Most common inventory-related fraud schemes: Double counting Capitalizing Cutoff problems Overestimating inventory Bill-and-hold sales Consigned inventory 9

10. Analyzing Financial Statements 10 Financial Statement Analysis for Revenue-Related Fraud Financial Statement Analysis for Inventory-Related Fraud