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Today’s Topics. Revenue Frauds Inventory Frauds Liability Frauds Other Asset Frauds Disclosure Frauds. The 7 Shenanigans-Revisited. Premature recording of revenue Bogus revenue One time “recurring” gains Shifting current expenses Unrecorded liabilities Revenue shifting

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today s topics
Today’s Topics
  • Revenue Frauds
  • Inventory Frauds
  • Liability Frauds
  • Other Asset Frauds
  • Disclosure Frauds

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-1

the 7 shenanigans revisited
The 7 Shenanigans-Revisited
  • Premature recording of revenue
  • Bogus revenue
  • One time “recurring” gains
  • Shifting current expenses
  • Unrecorded liabilities
  • Revenue shifting
  • Shifting future expenses

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-2

general detection model
General Detection Model
  • Period to period account balance analysis
  • Period to period relationship analysis
  • Comparison with industry averages
  • Comparison with physical assets
  • General horizontal and vertical analysis

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-3

revenue frauds
Revenue Frauds
  • Shenanigans #1 and #2
  • Table pps. 408-409
  • Revenue cycle
    • Sell goods or services
    • Estimate collectibility
    • Returns
    • Write-offs
    • Collect cash

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-4

revenue fraud detection
Revenue Fraud Detection
  • Detection
    • Accounting anomilies
    • Ratios (p.410)

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-5

inventory frauds
Inventory Frauds
  • Shenanigan #4
  • Table p. 420
  • Inventory cycle
    • Purchase inventory
    • Returns
    • Payment
    • Sell inventory
    • Write offs
    • Estimate or count inventory
    • Value inventory

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-6

inventory fraud detection
Inventory Fraud Detection
  • Detection
    • Statement of cash flows
    • Comparison with physical assets
    • Ratios (p.421)

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-7

liability fraud
Liability Fraud
  • Shenanigan #5
  • Table p. 442
  • Liability cycle
    • Purchase goods and services
    • Incur accruals
    • Sell goods and services
    • Borrow money
    • Payments on account
    • Assess contingencies

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-8

liability fraud detection
Liability Fraud Detection
  • Types
    • Understatement
    • Unearned revenue
    • Omission of debt and contingencies
  • Detection
    • Accounting anomilies
    • Ratios (p.449)

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-9

other asset fraud
Other Asset Fraud
  • Shenanigan #4
  • Types
    • Overstatement
    • Improper capitalization
    • Understated write offs

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-10

other asset fraud detection
Other Asset Fraud Detection
  • Detection
    • Accounting anomilies
    • Ratios (p.458; p.463)

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-11

inadequate disclosure fraud
Inadequate Disclosure Fraud
  • Misrepresentation
    • Company and its products
    • Via financial reports
    • Via footnote disclosures

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-12

disclosure fraud detection
Disclosure Fraud Detection
  • Detection
    • KTT
    • Questions on p.468
    • Use common sense
    • Compare footnotes
    • Vigorous use of inquiries
    • Go outside the box!
  • Fraud Buster Ratio
    • (NI - CFO)/Total Assets; should approach zero
    • Condition worsens as result grows

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-13

financial fraud detection
Financial Fraud Detection
  • KTT is the key
  • Use the Fraud Exposure Rectangle
    • Management & Directors
      • Background, motivation & influence
    • Company relationships
      • Obligations, related party transactions & compliance
    • Nature of organization & industry
    • Financial results & operations
      • GAAP, attitude

FORENSIC ACCOUNTING - BA124 – Spring 2008 Slide 11-14

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