chap 10 specific fraud risk areas Flashcards
revenue and related ____ and ____ accounts are especially susceptible to manipulation and theft
A/R Cash
auditing standards specifically require auditors to identify revenue ______ as a fraud risk in most audits
recognition
how can companies use the accounts of bad debt expense and allowance of doubtful accounts be used to manipulate revenue?
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
what 2 ratios are affected by inventory fraud
- gross margin percentage is overstaed due to the understatedment of COGS 2. inventory turnover is lowered
how can creation of fictitious employees be prevented?
separating the human resource and payroll functions
what are the 2 most useful warning signals or symptoms that indicate revenue fraud
- analytical procedures 2. documentary discrepancies
what is a way to manipulate fixed assets?
capitalize repair or other operating expenses as fixed assets
T/F even one unusual transaction in a sample should be considered a potential indicator of fraud that should be investigated
T
what are the 3 main types of revenue manipulation
- fictitious revenues 2. premature revenue recognition 3. manipulation of adjustments to revenues
what is one useful technique for detecting inventory fraud
analytical procedures
what are 3 methods for fraudulently accelerating revenue ?
- 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
how can payroll fraud via misappropriation occur?
- creation of fictitious employees 2. overstatement of individual payroll hours
when are fixed assets espcially vulneralbe to theft?
when they are easily portable
cases of fraudulent financial reporting involving A/P are relatively common but less frequent than frauds involving what other 2 accounts?
A/R inventory
fixed assets may be a target for manipulation because?
they are a large B/S account for many companies and are often based on subjectively determined valuations
what are 2 ways that make if difficult for the auditor to verify whether all liabilities have been recorded?
- if receiving reports are not prenumbered 2. if the company deliberately omits receiving reports from the accounting records
how can overstatement of individual payroll hours be prevented?
use of time clocks or approval of payroll hours
what is one of the most difficult frauds to detect?
when a sale is not recorded and the cash from the sale is stolen
what are the 3 ways to hide the theft when a customers payment is stolen?
- 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
auditors should read agreements with suppliers when amounts are material and make sure that ?
the FSs reflect the substance of the agreements
what is the difference between premature revenue recogiition and cutoff errors?
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
why is it easy for some companies to add fictitious inventory to accounting records?
because they have varied and extensive inventory in multiple locations
the deliberate understatement of AP generally results in what three things?
understatement of purchases understatment of COGS overstatement of NI