Post-Conference

Auditing and Investigating Fraud

Seminar

Auditing Track

Financial Statement Fraud Schemes

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Introduction to Financial Statement Fraud

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

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Financial Statement Fraud Schemes

Overstated assets or

revenues

Understated liabilities

or expenses

Improper disclosures

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Overstated Assets or Revenues

Fictitious revenues

Timing differences

• Improper matching of revenues and expenses

• Early revenue recognition

Improper asset valuation

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Understated Liabilities and Expenses

Liability/expense omissions

Recording expenses in the wrong period

Improper capitalizing/expensing

Returns/allowances and warranties

Post-retirement benefits

Operating vs. capital leases

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Improper Disclosures

Related-party

transactions

Liability omissions

Significant events

Management fraud

Accounting changes

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Red Flags of Financial Statement Fraud

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

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Red Flags of Financial Statement Fraud

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

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Detection of Financial Statement Fraud

Vertical analysis

Horizontal analysis

Ratio analysis

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Vertical Analysis

Analyze relationships between items on a

financial statement by expressing components

as percentages of specific line item.

• On income statement, net sales = 100%

• On balance sheet, total assets/total liabilities and

equity = 100%

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Horizontal Analysis

Analyze the percentage

change in individual

financial statement

items from one year to

the next.

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Ratio Analysis

Means of measuring the relationship between

two different financial statement amounts

• Accounts receivable turnover

• Sales to total assets

• Related-party sales to total assets

• Leverage ratios

• Ratios involving non-financial data

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