Chapter 15 Flashcards
Explain fraud
is know as misrepresentation of the truth
The definition of frauds has four element. Identify them and explain them
False statement : The perpetrator either lies directly or hides it
Knowledge : the perpetrator knows the statement is false
Reliance : the victim relies on info when deciding or acting
Damages: victim suffer the damages as result of relying on false statement
During fraud risk assessment what are they usually categorized
financial
Operational
compliance
External fraud si
perpetrated by customer, vendor or other outside parties against the company
Occupation fraud ( called internal fraud) is
committed by owners, management, executive and employees who use their position to enrich themselves
What are the three categories of occupational fraud
Corruption
Asset misappropriation
Financial statement fraud
Explain corruption
the inappropriate use if influence to obtain a benefits contrary to the perpetrator responsibility or therights of people
Whats are the 4 types of corruption and explain them
Conflict of interest : employees prioritize their personal interest overs those of the company
Illegal gratuities :Manager or executives receive something of value as a rewards for favorable business decision
Commercial bribery : Employees accept payment or something of value for favorably influencing business decision
Economic extortion: Employees threaten someone to pay up or else bear the consequences
What are behavioural red flags
Clues that indicate the possibility a person may be invled into fraud
What are the six common behavioural red flags
Financial difficulties
Living beyonds ones means
Close associations with vendor or customer
Recent divorce or family problem
Control issue or unwillingness to share duties
Big shot attitude
What is the fraud triangle
a framework that is used to identifies the three motivational element associated with fraud
What are the three element on the fraud triangle
Perceived pressure
Opportunity
rationalization
Explain perceived pressure
motive or an incentive that pushes a person toward the decision to commit fraud
Whats are example of perceived pressure
drug or gambling
inability to pay debts
maintaining a certain lifestyle
What are the opportunity for fraud
poor internal controls
Collusion
management override
Explain tone at the top
the culture of an organization that flows downstream from executive leaderships and it impact in all ares
Whats are the ways companies detect fraud
identifying non behavioural red flags at a process or entity level
Setting a whistleblower hotlines
Using data analytic to continuously monitor process and systems for fraud trends
Conducting independent checks of peoples work
Reviewing adequate documentation that leaves an audit trail
What are the 2 type of financial statement analysis
Horizontal analysis
Vertical analysis
Explain vertical analysis
Involved calculating each line item in the same financial statement as a percentage of another line item in the same financial statement
Explain horizontal analysis
involved investigating the changes in financial statement item by comparing the 2 or more financial statements from different periods
Whats asset misappropriation
theft of corporate assets , cash, inventory, fixed asset and more
What is skimming
employees steals cash before is records in the accounting records
Whats is Larcency
theft of the company assets after the company has recorded the assets in its books
explain unconcealed larcency
employee does not make an effort to concel the theft
Explain fictitious sales larcency
employee creates a fake sales receipt for the stolen phone
Explain fraudulent disbursements
employees cause the business to make a payment for an inappropriate purpose ( most common type of asset misappropriation )
Expense reimbursement scheme is
reimburse the perpetrator for expenses the never incurred
Double dipping is
submitting a valid credit card expense twice: once as credit car the other as a cash transaction
What is a payroll scheme
business pays the perpetrator for time not worked
Billing schemes is
result in fraudulent payments to vendors
Whats financial statement fraud
materially misrepresenting the financial results of a company by manipulating the amounts or inappropriately disclosing information in the financial statement to deceive investor and other users of the financial statements
Two kinds of financial statements that are commonly used are
Overstating, asset, revenues and profits
Understating liabilities, expenses and losses
What are the ways to overstate revenue, assets and profits
Sham sales : fictitious revenue with false documentation
Unauthorized shipments: creating goods that never orders
Channel stuffing : Encourage the sales of extra inventory to increase the current year sales, implied that customer can return it but not providing a reserve against theses expected return in the current year
Sales cutoff: Involved recording the sales that occur after the balance sheet date in the current year of financial statement to inflate the sales
What are ways to understate liabilities, expense and loses
Capitalization of expense : recognizing cost that should be expensed as capitalized cost
Expense cutoff: expense are not recorded until the next accounting period
What are the three fraud scheme related to understating revenue and explain them
Misclassification of revenue: inappropriately recognize revenue as a different type of income
Sales cutoff: rather than recognizing the sales , company defer revenue until the next accounting period
Unrecorded revenue: involves not documenting sales or destroying sales documentation and diverting funds and more
How will a company overstated expense
Expensing capitalized cost: company recognizes capital cost that should be recorded to an asset account as expense, thus reducing net income
Expense cutoff: prematurely recording them in the current accounting period rather the next one
