Post-Conference Auditing and Investigating Fraud Seminar

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Post-Conference
Auditing and Investigating Fraud
Seminar
Auditing Track
Financial Statement Fraud Schemes
Introduction to Financial Statement Fraud
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Least common but most costly form of
occupational fraud
Almost always involves upper management
Undertaken to:
Misrepresent the company’s financial health to
outsiders
• Meet compensation-linked performance goals
•
2 of 12
Financial Statement Fraud Schemes
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Overstated assets or
revenues
Understated liabilities
or expenses
Improper disclosures
3 of 12
Overstated Assets or Revenues
Fictitious revenues
Timing differences
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Improper matching of revenues and expenses
Early revenue recognition
Improper asset valuation
4 of 17
4 of 12
Understated Liabilities and Expenses
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Liability/expense omissions
Recording expenses in the wrong period
Improper capitalizing/expensing
Returns/allowances and warranties
Post-retirement benefits
Operating vs. capital leases
5 of 17
5 of 12
Improper Disclosures
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Related-party
transactions
Liability omissions
Significant events
Management fraud
Accounting changes
6 of 17
6 of 12
Red Flags of Financial Statement Fraud
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Slowdown for previously fast-growing company
Industry changes
Significant pressure to obtain additional capital
Unusually high dependence on debt
Significant, unusual, or highly complex
transactions, especially close to year-end
Significant estimates involving unusually
subjective judgments or uncertainties
7 of 17
7 of 12
Red Flags of Financial Statement Fraud
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Significant high-risk investments
Management incentives tied to unreasonable
growth or profitability expectations
Lax attitudes about regulatory requirements
History of claims alleging fraud
Lack of established policies or controls
Lack of proper training
Lack of enforcement of procedures
8 of 17
8 of 12
Detection of Financial Statement Fraud
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Vertical analysis
Horizontal analysis
Ratio analysis
9 of 17
9 of 12
Vertical Analysis
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Analyze relationships between items on a
financial statement by expressing components
as percentages of specific line item.
•
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On income statement, net sales = 100%
On balance sheet, total assets/total liabilities and
equity = 100%
10 of 12
Horizontal Analysis
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Analyze the percentage
change in individual
financial statement
items from one year to
the next.
11 of 17
11 of 12
Ratio Analysis
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Means of measuring the relationship between
two different financial statement amounts
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Accounts receivable turnover
Sales to total assets
Related-party sales to total assets
Leverage ratios
Ratios involving non-financial data
12 of 17
12 of 12
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