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Audit Part 3 > chap 10 specific fraud risk areas > Flashcards

chap 10 specific fraud risk areas Flashcards

1
Q

revenue and related ____ and ____ accounts are especially susceptible to manipulation and theft

A

A/R Cash

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2
Q

auditing standards specifically require auditors to identify revenue ______ as a fraud risk in most audits

A

recognition

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3
Q

how can companies use the accounts of bad debt expense and allowance of doubtful accounts be used to manipulate revenue?

A

they can attempt to reduce bad debt expense by understating the allowance for doubtful accounts. the allowance depends on the age and quality of A/R so you can alter the aging of A/R to make them appear more current

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4
Q

what 2 ratios are affected by inventory fraud

A
  1. gross margin percentage is overstaed due to the understatedment of COGS 2. inventory turnover is lowered
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5
Q

how can creation of fictitious employees be prevented?

A

separating the human resource and payroll functions

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6
Q

what are the 2 most useful warning signals or symptoms that indicate revenue fraud

A
  1. analytical procedures 2. documentary discrepancies
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7
Q

what is a way to manipulate fixed assets?

A

capitalize repair or other operating expenses as fixed assets

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8
Q

T/F even one unusual transaction in a sample should be considered a potential indicator of fraud that should be investigated

A

T

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9
Q

what are the 3 main types of revenue manipulation

A
  1. fictitious revenues 2. premature revenue recognition 3. manipulation of adjustments to revenues
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10
Q

what is one useful technique for detecting inventory fraud

A

analytical procedures

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11
Q

what are 3 methods for fraudulently accelerating revenue ?

A
  1. bill and hold sales - goods invoices before they are shipped….can be legitamate depeding on the contract terms 2. issuing side agreements that modify the terms of the sales transaction…ex. sell inventory at year end but have side agreement for more favorable pricing and unrestricted return of goods if not sold by customer 3. having a transaction that has sales, financing, and service component and allocating more of the transaction to the sales component than is indicated so you can recognize more revenue
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12
Q

how can payroll fraud via misappropriation occur?

A
  1. creation of fictitious employees 2. overstatement of individual payroll hours
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13
Q

when are fixed assets espcially vulneralbe to theft?

A

when they are easily portable

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14
Q

cases of fraudulent financial reporting involving A/P are relatively common but less frequent than frauds involving what other 2 accounts?

A

A/R inventory

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15
Q

fixed assets may be a target for manipulation because?

A

they are a large B/S account for many companies and are often based on subjectively determined valuations

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16
Q

what are 2 ways that make if difficult for the auditor to verify whether all liabilities have been recorded?

A
  1. if receiving reports are not prenumbered 2. if the company deliberately omits receiving reports from the accounting records
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17
Q

how can overstatement of individual payroll hours be prevented?

A

use of time clocks or approval of payroll hours

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18
Q

what is one of the most difficult frauds to detect?

A

when a sale is not recorded and the cash from the sale is stolen

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19
Q

what are the 3 ways to hide the theft when a customers payment is stolen?

A
  1. record a sales return or allowance 2. write off the customers account 3. apply the payment from another customer to the customers account…also called lapping
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20
Q

auditors should read agreements with suppliers when amounts are material and make sure that ?

A

the FSs reflect the substance of the agreements

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21
Q

what is the difference between premature revenue recogiition and cutoff errors?

A

premature revenue recognition is the recognition of revenue before accounting standards requirements for recording revenue have been met and cuttoff errors are transactions that have inadvertently been recorded in the incorrect period

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22
Q

why is it easy for some companies to add fictitious inventory to accounting records?

A

because they have varied and extensive inventory in multiple locations

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23
Q

the deliberate understatement of AP generally results in what three things?

A

understatement of purchases understatment of COGS overstatement of NI

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24
Q

fictitiious revenue and premature revenue recognition overstate the gross margin percentage if what?

A

the related cost of sales is not recognized

25
Q

why are fixed assets a target for theft?

A

becuse of their value and salability

26
Q

fixed assets are a target for manipulation especially for companies without material what? (2)

A

recievables and inventories

27
Q

all purchases _____ before the end of the year should be recorded as liabilitie

A

recieved

28
Q

what are two ways to reduce the potential for theft of fixed assets?

A
  1. physically protect them whenever possilbe, engraved, or otherwise permanently labeled 2. periodically inventory them
29
Q

auditors often find it difficult to do what in relation to inventory? (2)

A
  1. verify the existence 2. verify the valuation
30
Q

why is inventory susceptib le to misappropriation (misappropration of revenue)>?

A

because is is usually readily saleable

31
Q

even though misappropration of cash receipts is rarely as material as fraudulent reporting of revenues, why can these frauds be costly to the company?

A

because of the direct loss of assets

32
Q

how can the fraud of issuing payments to fictitious vendors and depositing the cash in a fictitious account be prevented? (2)

A
  1. allowing payments to be made only to approved vendors 2. carefully looking at documentation supporting the acquistions by authorized personnel before payments are made
33
Q

when the normal ways to determine if all liabilities have been recorded are not possible, what can help in signaling that A/P is understated?

A

unusual changes in ratios

34
Q

significat misappropirations involving purchases can occur in the form of what? (2)

A
  1. payments to fictitous vendors 2. kickbacks and other illegal arrangements with suppliers
35
Q

more than half of FS frauds involve what two accounts?

A

revenues and A/R

36
Q

what is the fruadulent financial reporting risk for inventory

A

fictitious inventory

37
Q

what is often the largest account on companies B/Ss?

A

inventory

38
Q

what are 2 ways that understating A/P and overstating income can be accomplished?

A
  1. not recording A/P until subsequent period 2. recording fictitious reductions to A/P{
39
Q

how do auditors often address fraud risks related to intangible assets?

A

involve specialist such as business valuation experts, to assist in the evaluation of audit evidence related to managments recorded amounts

40
Q

why are fixed asset frauds relatively easy to detect?

A

the auditor can examine evidence supporting fixed asset additions

41
Q

how wold a company manipulate the adjustment to revenue via the sales return and allowances account?

A

the sales return is hidden and the returned good is counted as part of physical inventory which can increase reported income. An asset increase is recognized through the counting of physical inventory but the reduction in the related A/R balance is not made

42
Q

dependin on the client’s ____, certain accounts are especially susceptible to manipulation or theft

A

industry

43
Q

how can the fraud of stealing a check from a legitamate vendor and then resubmitting documentation related to the purchase for payment to the vendor be prevented?

A

cancelling supporting documents to prevent their use as support for mulitple payments

44
Q

why is cash highly susceptible to theft?

A

because sales are often made for cash or are quickly converted to cash

45
Q

larger thefts of sales and related cash receipts are best detected by what?

A

analytical procedures and other comparisons

46
Q

why does an overstatement of revenues often increase net income by an equal amount?

A

because related COGS are usually not recognized on fictitious or prematurely recognized revenues

47
Q

inventory is susceptible to manipulation by managers who want to do what?

A

achieve certain financial reporting objectives

48
Q

what is rarelyu a significant risk area for fraudulent financial reporting?

A

payroll

49
Q

why are intangilbe assets subject to manipulation by managment?

A

because their valuations are based on estimates and subjective assumptions

50
Q

small thefts of sales and related cash receipts are best prevented and detected by what?

A

internal controls designed to minimize the opportunity for fraud

51
Q

what is the most common adjustment to revenue?

A

sales returns and allowances

52
Q

since auditors are required to verify the existence of physical inventories, why is it easy for compnaies to have fictitious inventories?

A

because audit testing in done on a sample basis and not all locations with inventory are typically tested…in some cases auditors told the client which locations were going to be tested ahead of time so they were able to move inventory around

53
Q

how many companies commit financial reporting fraud with payroll? (3)

A
  1. overstate inventories and net income by recording excess labor costs in inventory 2. excess labor cost may be capitalized as fixed assets 3. fringe benefits like retirement benefits can be manipulated
54
Q

intangible assets are based mostly on accounting _____ dependent on subjective assumptions about what?

A

estimates their future benefits to the company

55
Q

______ and related A/R and cash accounts are especially susceptible to manipulation and theft

A

revenue

56
Q

what is the most common fraud in the acquisitions area?

A

to issue payments to fictitious vendors and deposit the cash in a fictitious account

57
Q

analytical procedure often signal revenue frauds espcially what two ratios?>

A
  1. gross margin percentage 2. account receivable turnover
58
Q

how does ficitious revenues lower A/R turnover?

A

because the fictitious revenues are also included in uncollected receivables

59
Q

what are 3 reasons revenue is susceptible to manipulation?

A
  1. most important, revenue is almost always the largest account on the I/S, so a misstatment representing a small percentage of revenues can still have a large effect on income 2. revenue is often a key performance indicator for analysts and investors, providing incentive to inflate them 3. the difficulty of determining the appropriate timing of revenue recognition in many situations

Audit Part 3 (19 decks)

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