522 - Exam 2 Flashcards
Ch5: Indications of Financial Statement Fraud include: (5)
- Downward trends in earnings quality and quantity (ex. 1-time transactions < retail sales)
- Inadequate Cash Flows for reported earnings (CF should inc./dec. w/ earnings)
- Overstated Inventories or Accounts Receivable (Suspicious LIFO-FIFO & ADA Valuations)
- Aggressive Accounting (“Forced” Rev.Rec., Depreciation, Capitalization)
- “Short-Termism” (Mgmt. is overly concerned with quarterly earnings guidance)
Ch5: Def: Aggressive Accounting
“Forced” Rev.Rec., Depreciation, Capitalization
Ch5: Common Rev. Rec. Schemes (7)
- Sham Sales
- Recognition before terms of sale are completed
- Conditional Sales (Unlimited Right of Return)
- Improper Sales Cutoff
- Percentage of Completion (vs. Completed Contract method)
- Unauthorized Shipments (Channel Stuffing)
- Consignment Sales (No transfer of title)
Ch5: Common asset accounts to overstate (8) [acronym CANO PIPI]
Cash
Notes Receivable
Accounts Receivable
Oil, gas, mineral reserves
PP&E
Inventory
Patents
Investments
Ch5: Common Approaches to Overstate Assets (5) [Keyword “Approaches’ think acronym = A FIFO]
A (ADA) - Understated ADA (Overstates AR)
F (Fictitious) - Fictitious assets
I (Improperly)- Improperly capitalized items (should have been expensed)
F (FMV) - Inflated FMV of existing assets
O (Owned) - Assets Owned by others
Ch5: Def: Whistle-blowing
Whistle-blowing - An individual with knowledge of wrongdoing informs those with the authority to remedy the wrong
Ch5: Whistle-blowing Process (6 steps)
- Serious wrongdoing (e.g. FS Fraud)
- Whistle-blower observes or becomes aware of event
- Whistle-blower informs internal authority (e.g. Supervisor, Audit Committee)
- No satisfactory internal response
- Whistle-blower does cost/benefit analysis of external reporting
- Whistle-blower informs external authority
Ch5: SOX Whistleblowing Requirements (7 [Keyword “Requirements” think “AICPA” or acronym = A[I&E]CPA-90-DoL]
- Audit Committee MUST establish whistle-blowing procedures
- Internal AND External whistleblowing procedures are required
- Complaints must be accepted, retained, & responded to
- Procedures must maintain confidentiality/anonymity of whistle-blower
- Attacking whistleblowers is prohibited (SOX: Section 806) (ex. discharging, demoting, suspending, threatening, harassing, discrimination)
- Whistle-blower has 90 days to inform OSHA of violations
- Dept. of Labor resolves disputes (If not, District Courts)
Ch5: Whistleblowers could inform the following parties (6) [ALARM B]
A - Audit Committee L - Law Enforcement (DOJ, DAs, etc.) A - Internal AND External Auditors R - Regulatory Agencies (e.g. SEC, PCAOB, OSHA, etc.) M - Mgmt. (Non-involved)
B - Board of Directors
Ch5: Def: TRA
Targeted Risk Assessment - refines the fraud detection process by focusing the investigator’s efforts
Ch5: TRA’s - Risk of Fraud is ALWAYS greater if: (4) [O OCI]
Mgmt. Override (O) of IC is likely
Collusion (C) is likely
Overseas (O) operations
High-risk industry (I) (FSO’s or industries under SEC scrutiny)
Ch.7: Def: Business Judgment Rule
Business Judgment Rule - Protects directors from undue liability when making business decisions in good faith & in the best interests of the company & its shareholders
Ch.7: Def: CEO Duality (def. and 5 concepts)
CEO Duality - CEO also serves as Chairman of the Board
- Tends to compromise shareholder interests
- Associated w/ Inc. FS fraud
- NOT forbidden by US rules, regulations
- Other countries (e.g. England) promote separation
- If exists, board should be managed & run by lead director
Ch.7: Directors and Officers Insurance (3) [PC-DE-SV]
Paid for by corporation
Deductible expense for firm
Reduces shareholder value
Ch.7: Corporate Liability costs (3) [LSD]
Litigation expenses (Usually paid by firm)
Settlements (Usually paid by firm or D&O insurance*)
Directors RARELY pay “out of pocket”
Ch.7: Plurality vs. Majority Voting (T/F Q on exam)
Plurality Voting – Highest number of affirmative votes wins
- Negative & abstaining votes are ignored
- One positive vote wins
Majority Voting – Must get majority of ALL shareholder votes
- Adoption began in 2005
- 2012 - 80% of corporations use it
- But some loopholes still apply
Ch.7: Philosophies of Bod Stock Ownership - When ownership increases: (4) (Matching Q on exam)
- Likelihood of FS fraud dec. - Reason: Provides incentive to monitor FSs & ICFR
- Directors are more likely to promote activities that create shareholder value - Reason: They benefit financially
- CEO-CFO efforts to control these directors increases
- Independence, objectivity, effectiveness in monitoring CEO-CFO may be compromised
Ch.9: Gamesmanship Def. (4 keywords in blue from slideshow)
Keywords in blue (from slide): earnings management, profit projections , analysts’ projections, stock prices
Definition: “Unacceptable, unethical, & illegitimate earnings management, to push accounting guidelines to the limit, create the rosiest profit projections possible, to meet analysts’ projections and sustain or boost stock prices” through:
- Smoothing earnings
- Overstating restructuring charges and creating a buffer (“Rainy day fund”)
- Overstating revenues and assets
- Deferring expenses
- Recognizing sales before completion
L5: Measures of Variability
Min Max IQR (Q3-Q1) Range (Max-Min) SD CV (SD/Mean) Anderson-Darling test Levene’s Test
L5: Skew + or -
\+ = more small numbers - = more large numbers
L5: Measures of Central Tendency
MMM
L5: IQR
IQR = Q3-Q1
Spread of middle 50% of data
Excel Limitations
Max Rows = 2^20
Max Cols = 2^14
Max Mem: 2GB
Difficult to tell calc values from entered values
Import Limitation: Data is likely incomplete if it has exactly 16,384 records (max cols) , caused by automated imports that attempt to follow Excel’s limits
COUNTIFS Syntax
=COUNTIFS (range1, criteria1, [range2], [criteria2], …)
range1 - The first range to evaulate.
criteria1 - The criteria to use on range1.
range2 - [optional] The second range to evaluate.
criteria2 - [optional] The criteria to use on range2.
SUMIFS Syntax
SUMIFS(sum_range, criteria_range1, criteria1, [criteria_range2, criteria2], …)
Purpose - Sum cells that match multiple criteria
Return value - The sum of the cells that meet all criteria
Arguments:
sum_range - The range to be summed.
range1 - The first range to evaulate.
criteria1 - The criteria to use on range1.
range2 - [optional] The second range to evaluate.
criteria2 - [optional] The criteria to use on range2.
Notes:
Non-numeric criteria must be enclosed in double quotes, but numeric criteria does not need quotes EXCEPT with operators (i.e. “>32”)
SUMIF vs. SUMIFS
Order of arguments is different
Sum_range is the first argument in SUMIFS, but the third argument in SUMIF
SUMIF
Syntax =SUMIF (range, criteria, [sum_range])
Purpose - Sum numbers in a range that meet supplied criteria
Return value - The sum of values supplied
Arguments:
range - The range of cells that you want to apply the criteria against.
criteria - The criteria used to determine which cells to add.
sum_range - [optional] The cells to add together. If sum_range is omitted, the cells in range are added together instead.
Notes:
Text criteria, or criteria that includes math symbols, must be enclosed in double quotation marks (“).
Numeric criteria can be supplied without quotation marks
L4: Data Profiles Verify:
- Completeness (Reconcile total of all values to known total)
- AUDIT: Completeness Assertion
- Normal Ranges (Ex. Low Value Invoices (< $50) ≈ 15% of total)
- Too many Zero invoices (Suspicious or wasteful)
- Credit Memos (Corrections ≈ 3% of total; Low (< 3%) = Not enough corrections being made; High (> 3%) = Why so many corrections?)
- Negative Amounts (Credits = deductions from invoiced amounts; shouldn’t exist for Inventory, Payroll, Mileage Readings, etc.)
L4: Data Histogram (Frequency Graph)
- Graphic vs. Tabular (Data Profile)
- Shows distribution of numerical data
- SKEW
- Shows the number of items within a given range
- Upper and lower boundaries for each range must be specified
