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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

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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 2008Slide 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 2008Slide 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 2008Slide 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 2008Slide 11-4


Revenue fraud detection

Revenue Fraud Detection

  • Detection

    • Accounting anomilies

    • Ratios (p.410)

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 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 2008Slide 11-6


Inventory fraud detection

Inventory Fraud Detection

  • Detection

    • Statement of cash flows

    • Comparison with physical assets

    • Ratios (p.421)

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 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 2008Slide 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 2008Slide 11-9


Other asset fraud

Other Asset Fraud

  • Shenanigan #4

  • Types

    • Overstatement

    • Improper capitalization

    • Understated write offs

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 11-10


Other asset fraud detection

Other Asset Fraud Detection

  • Detection

    • Accounting anomilies

    • Ratios (p.458; p.463)

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 11-11


Inadequate disclosure fraud

Inadequate Disclosure Fraud

  • Misrepresentation

    • Company and its products

    • Via financial reports

    • Via footnote disclosures

FORENSIC ACCOUNTING - BA124 – Spring 2008Slide 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 2008Slide 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 2008Slide 11-14


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