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    Albrecht, Albrecht, & Albrecht: Revenue-And Inventory-Related Financial Statement Frauds

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    FatimaIjaz
    Gross Profit Margin

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    Albrecht, Albrecht, & Albrecht: Revenue-And Inventory-Related Financial Statement Frauds

    Uploaded by

    FatimaIjaz
    140 views28 pages
    Gross Profit Margin

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    ch12_2.ppt

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    Gross Profit Margin

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    140 views28 pages

    Albrecht, Albrecht, & Albrecht: Revenue-And Inventory-Related Financial Statement Frauds

    Uploaded by

    FatimaIjaz
    Gross Profit Margin

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 28
    At a glance
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    The key takeaways are that revenue fraud is the most common fraud committed and it involves prematurely recording or manipulating revenue accounts. Inventory fraud also occurs by overstating inventory values which understates the cost of goods sold and overstates net income.

    Common ways to commit revenue fraud include manipulating revenue accounts and recording revenues prematurely before they are earned according to revenue recognition standards.

    Inventory and cost of goods sold can be manipulated to commit fraud by overstating ending inventory values which understates the cost of goods sold expense and overstates net income. Purchases can also be understated to further reduce the cost of goods sold.

    FRAUD EXAMINATION

    ALBRECHT, ALBRECHT, & ALBRECHT

    Revenue- and
    Inventory-Related
    Financial Statement
    Frauds
    Chapter 12
    Learning Objectives
    1. Identify revenue-related financial
    statement fraud schemes.
    2. Understand revenue-related financial
    statement fraud schemes.
    3. Identify ways to proactively search for
    revenue-related financial statement
    fraud schemes.
    Learning Objectives
    4. Understand the importance of, and
    ways to follow up on, revenue-related
    fraud symptoms.
    5. Identify inventory and cost of goods
    sold financial statement fraud
    schemes.
    6. Understand inventory and cost of
    goods sold financial statement fraud
    symptoms.
    Learning Objectives
    7. Identify ways to search for inventory and
    cost of goods sold financial statement fraud
    schemes.

    8. Understand the
    importance of, and
    ways to follow up
    on, inventory and
    cost of goods sold
    fraud symptoms.
    List Common Ways to Commit
    Revenue Fraud.

    1. Manipulate Factoid
    Revenue
    Accounts Revenue
    fraud is the
    2. Record most
    Revenues common
    Prematurely fraud
    committed.
    Why Are Revenue Frauds so
    Common?
    1. GAAP (Generally Accepted Accounting
    Principles) allows too many alternative
    ways to recognize & record revenue.
    2. It is an easy fraud to commit.
    How is it done?
    1. Report Early
    2. Create Fictitious Revenues
    3. Hold Books Open 1 Year +
    Complete the Chart
    Typical Revenue Related Transactions
    1 Sell goods & services to customers

    2 Estimate uncollectible A/R

    Accept YES
    3 From Goods Returned
    Customer NO 4
    Write Off
    NO Receivables
    Receivable Paid as Uncollectible
    YES
    NO Collect Cash
    Discount Taken After Discount
    YES 5 Period
    6 Collect cash within discount period
    Discuss
    What to Look For?
    1.Analyze the balances & relationships
    within the statements.

    2.Look for unusual changes in revenue-


    related accounts balances from period
    to period (looking for trends), and

    3.Look for changes in revenue-related


    relationships from period to period.
    What Kind of Changes
    Should You Look For?
    4. Compare the statement amounts &
    relationships with other data.

    5. Compare the companys financial


    results & trends with those of similar
    firms in the same industry, and

    6. Compare financial statement amounts


    with the assets they are supposed to
    represent.
    Discuss Revenue-Related
    Fraud Symptoms.
    Analytical symptoms
    Accounting or
    documentary
    symptoms
    Lifestyle symptoms
    Control symptoms
    Behavioral or verbal
    symptoms
    Tips and complaints
    Complete this Table
    Analyzing Financial Look for unusual Look for unusual
    Balances and changes in changes in
    Relationships revenues and revenue-cycle-
    within Financial accounts receivable account
    Statements balances from relationships from
    period to period period to period.
    (trends).

    Comparing Compare financial Compare recorded


    Financial Statement results and trends amounts in the
    Accounts or of the company financial
    Relationships with with those of statements with
    Nonfinancial similar firms in the nonfinancial
    Statement same industry. statement
    Information amounts
    What is the Formula for
    Measuring Period to Period
    Changes?

    Period 2 - Period 1
    account balance account balance

    Period 1 account balance


    What is an Alternative to
    the Prior Formula?
    Make the Balance Sheet & Income
    Statement into Change Statements
    HOW?

    Perform Horizontal & Vertical Analysis

    Compare to Statements of Changes in


    Cash

    Circle the Preferred


    Match Ratio to Name.
    Gross Profit Sales Returns
    Margin Total Sales
    Sales Gross Profit
    Return % Net Sales
    Net Sales
    Sales
    A/R
    Discount %
    A/R Turnover
    A/R Turnover 365
    Number of Sales Discounts
    Days in A/R Gross Sales
    Match Ratio to Explanation.

    Allowance for A measure of


    Uncollectible profitability
    Accounts
    Estimated uncollectible
    Bad Debt A/R, a contra-asset,
    Expense
    Common Size Financial statements
    Financial converted to %
    Statements
    Expense for revenues or
    Earnings receivable presumed
    per Share uncollectible
    Do Ratio, Vertical or Horizontal
    Analysis Tell if Fraud Has Been
    Committed?
    List Other Investigative
    Procedures You Could Perform.

    Compare to companies in
    same industry

    Compare F/S to actual


    assets
    Leads to
    Search for internal control
    Opportunity
    weaknesses
    Comment on Behavior &
    Lifestyle Flags.

    Enhanced
    Revenue Fraud
    Performance

    Indirect Benefit to Perpetrators

    Questions and Observation


    Discuss TIPS.
    Ombudsman or Hotline
    People dont know who to talk to
    People dont want to wrongfully accuse
    someone else
    Whistleblower repercussions
    People feel they have suspicions, not
    knowledge
    Explain How Inventory & Cost
    of Goods Sold Are Manipulated
    to Commit Fraud.

    Overstating
    Inventory
    Increases Net
    Income
    Because Cost
    of Goods Sold
    Decreases
    Review Effect of Overstating
    Inventory on a Simplified
    Income Statement.
    Gross Revenues (Sales)
    -Sales Returns
    -Sales Discounts
    Net Revenues (Sales)
    -Cost of Goods Sold Understated
    Gross Margin Overstated
    -Expenses
    Net Income Overstated
    Review Effect of Overstating
    Inventory & Understating
    Purchases on Cost of Goods Sold.
    Overstated Understated
    Ending Inventory Purchases
    Beginning Inventory No Effect No Effect
    +Purchases No Effect Understated
    -Returns to Vendor No Effect No Effect
    -Purchase Discounts on
    Inventory No Effect No Effect
    Goods Available for Sale No Effect Understated
    -Ending Inventory Overstated No Effect
    Cost of Goods sold Understated Understated
    Complete Inventory
    Cycle.
    Purchase Inventory

    Determine
    Inventory Costs Return Goods?

    Count Inventory Take Discount?

    Inventory Counted? Pay Vendor

    Obsolete? Sell Inventory?


    Identify Some Inventory
    Fraud Symptoms.
    Complete Chart.
    Analysis of Analysis of
    Period-to-Period Changes Period-to-Period Changes
    Inventory Account Balances With Industry Competitors
    1. Focus on Changes in 1. Compare Statement
    Statement Numbers Results with Similar
    2. Study Statement of Cash Companies
    Flow 2. Compare Companys
    3. Use Horizontal Analysis trends with those of
    similar companies
    Inventory Relationships With Real-World Numbers
    1. Examine Changes in 1. Compare Statement
    Relevant Ratios Amounts with the Assets
    2. Use Vertical Analysis They Are Supposed to
    Represent
    Discuss Inventory Fraud
    Symptoms.
    Analytical symptoms
    Accounting or
    documentary
    symptoms
    Lifestyle symptoms
    Control symptoms
    Behavioral or verbal
    symptoms
    Tips and complaints
    Match Ratio to Name.
    Allowance for Financial statements
    Doubtful converted to %
    Accounts
    The expense of goods
    Bad Debt sold to customers
    Expense
    A contra receivable,
    Cost of estimated uncollectible
    Goods Sold A/R
    Common-Size Expensing estimated
    Financial uncollectible A/R or
    Statements revenues
    Match Ratio to Name.

    Earnings Per Sales returned by


    Share customer for refund

    Determining when revenues


    Revenue
    are earned & can be
    Recognition
    reported on the income
    statement
    Sales
    Returns A measure of profitability

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