Exam 3 Flashcards
What are the two ways to commit fraud with inventory and other non-cash assets?
- Misuse
- Larceny
What are the 4 ways to commit larceny involving inventory and non-cash assets?
- Asset req. & transfers
- False sales & shipping
- Purchasing and receiving
- Unconcealed larceny
Misuse - “borrowed” but not stolen non-cash assets is….
Non-cash tangible asset misappropriations
What are 4 typical misused - borrowed but not stolen - non-cash tangible assets?
- Company vehicles
- Company supplies
- Computers
- Other office equipment
True or False?
Unauthorized use of a company asset does amount to fraud, even when a false statement doesn’t accompany the use.
False.
It is considered fraud when a false statement accompanies the use.
What are 4 costs of inventory misuse?
- Loss of productivity
- Need to hire more
- Lost business
- Wear and tear
The most basic type of theft…
Larceny
Where an employee takes property from the company premises without attempting to conceal it in the books and records.
Unconcealed Larceny
True or false?
Most unconcealed larceny schemes are complex, done by the least trusted employees.
False.
Most unconcealed larceny schemes are very simple, usually done by the most trusted employees.
An asset misappropriation that can involve an employee and a customer. The employee bags the merchandise and may act as though a transaction is being entered on the register, but in fact, the “sale” is not recorded.
Fake Sale
What are 4 ways to prevent and detect unconcealed larceny of non-cash tangible assets?
- Separation of duties
- Physical security
- Track access logs
- Security cameras
When documentation enables non-cash assets to be moved from one location to another. Internal documents can be used to fraudulently gain access to merchandise. Example: Requisition materials for project, steal materials or overstate amount of supplies, and keep excess.
Asset Requisitions and Transfers
Assets were intentionally purchased by the company but misappropriated (noncash scheme.) Falsifying incoming shipments, may also reject portion of shipment, where perpetrator keeps the “substandard” merchandise.
Purchasing and receiving schemes
False shipping and sales documents are created to make it appear that the inventory was sold. False packing slips can allow the inventory to be delivered to fraudster or accomplice. Fake “old” receivable is written off.
False shipments of inventory and other assets
Assets are written off in order to make them available for theft.
Other noncash scheme
Assets are declared as scrap and given to the employee.
Other noncash scheme
New Equipment is ordered for the company to replace old - new equipment is sent to employee’s home leaving old equipment in place.
Other noncash scheme
What is the key issue with inventory theft concealment?
Shrinkage
When an employee forces a reconciliation or/and deletes or covers up the correct totals and entering new totals related to inventory.
Altered inventory records
When an employee charges a sale to an existing account and write-offs to discounts and allowances or bad debt expenses.
Fictitious sales and accounts receivable
What is a way to eliminate the problem of shrinkage finding concealment?
Write off inventory or other assets
When an employee makes it appear that there are more assets present than there actually are.
Physical padding
What are 3 ways to prevent and detect thefts of non-cash tangible assets? (Refer to notes to review 9 other ways to prevent and detect)
- Separation of duties
- Match invoices to reports
- Match packing slip to purchase order
Includes theft of competitively sensitive information, can undermine value and result in legal liabilities.
Misappropriation of information
Internal controls fail, where investment portfolios are stolen or adjusted in a way to benefitthe perpetrator.
Misappropriation of securities
What are the 4 different examples of corruption?
- Conflicts of interest
- Bribery
- Illegal Gratuities
- Economic Extortion
Offering, giving, receiving, or soliciting any thing of value to influence an official act. Example: Commercial, kickbacks, bid-rigging
Bribery
Involve submission of invoices for goods and services that are either overpriced or completely fictitious, allowing the perpetrator to make a gain from the accomplice accepting invoice.
Kickback
Kickbacks are classified as________ schemes rather than _______ _________ because they involve collusion between employees and vendors.
- Corruption
- Asset misappropriation
What are 3 things brought on by kickback schemes?
- No economic pressure
- no incentive for quality
- Overpaying
With an employee with approval authority, vendor submits inflated invoice to employee of victim company, where employee approves.
Overbilling Scheme
Regarding overbilling schemes, what are 3 ways an employee without authority could make it work?
- False voucher
- Forge signature
- Slip fake invoice into real ones
What are 2 other kickback schemes?
- Discount bribery
- Slush funds
What are 3 ways to detect kickbacks?
- Price inflations
- Trends in COGS or services
- Excessive purchases
What are 3 ways to prevent kickbacks?
- Independent employee reviews purchases
- Right to audit clause
- No soliciting or gifts received for employees
When a bidder has more power over the bidding process, influencing others during the selection of the winning bid.
Bid-Rigging Schemes
Where a conspiracy between the buyer and contractor whereby an employee of the buyer receives something of value and, in return, recognizes a “need” for a particular product or service. (Look for trends)
Pre-Solicitation Phase
Includes listing of element materials, dimensions, and other relevant requirements. Uses “prequalification” procedures to eliminate certain vendors.
Specification schemes
Federal law requires competitive bidding on projects over a certain dollar value, so the project is broken into smaller projects below the mandatory bidding level.
Bid Splitting
Restricting the pool of vendors from which to choose.
The Solicitation phase
Process by which several bidders conspire to split up contracts and ensure that each gets a certain amount of work.
Bid pooling
Using quotes from fake companies to demonstrate that pricing is reasonable.
Fictitious suppliers
When the last bid is submitted is awarded the contract. Winner bidder finds out what the other bids are, allowing them to adjust their bid to win.
Fraud in the sealed bid process
What are 4 things of value used for bid-rigging schemes?
- Cash
- Promised things
- Gifts
- Bill payments or loans
Given to reward a decision rather than influence it.
Illegal gratuities
Employee demands payment from a vendor in order to make a decision in the vendor’s favor. “Pay up or else”.
Economic extortion
Who commits financial statement fraud?
- Senior management
- Mid/lower level employees
- Organized criminals
What are 3 ways people commit financial statement fraud?
- Playing the accounting system
- Beating the accounting system
- Going outside the accounting system
What are the 4 recognition and measurement concepts?
- Economic entity
- Going concern
- Monetary unit
- Periodicity
What are the 4 principles of recognition and measurement concepts?
- Historical cost
- Revenue recognition
- Matching
- Full disclosure
What are the 4 constraints of recognition and measurement concepts?
- Cost-benefit
- Materiality
- Industry practice
- Conservatism
Fraud occurs when ____ is intentionally avoided to show false profits.
Consistency
What are the 4 qualitative characteristics?
- Relevance & reliability
- Comparability and consistency
Who is responsible for financial statements?
Management
Who is responsible for the code of conduct?
Board of directors
Who is responsible for the companies ethics?
All employees
Established higher standards, responsibilities, qualities and protection for corporate companies.
SOX
Where public accounting firms that audit publicly traded companies register. This group inspects registered public accounting firms.
PCAOB
What are 3 duties of the PCAOB?
- Investigate registered public accounting firms
- Perform other duties to promote professional standards
- Enforce compliance with SOX
What is the difference of when corporate officers KNOWLINGLY or WILLFULLY violate certification requirements? (Criminal certifications)
Knowingly: $1 million and 10 years
Willfully: $5 million and 20 years
Which CEO/CFO certification is involved with reports being reviewed, doesn’t contain MM, and fairly represents the companies financial conditions?
Also, they design controls and notify when changes are made and disclose info to auditors and committee
Civil certifiications
What are the 2 things control reports are supposed to include?
- Management responsibilities
- Assessment of effectiveness
All annual reports are supposed to include what?
Control reports
What are 4 standards for auditor independence?
- Mandatory audit partner rotation
- Conflict of interest provisions
- Auditor reports to audit committees
- Auditors attestation to internal controls
What are 3 ways to enhanced financial disclosure requirements?
- Off-balance sheet transactions included
- Pro forma financial info
- Prohibitions of loans to officers
Makes it a crime to knowingly, with the intent to retaliate, take any harmful action against a person for providing truthful information relating to the commission or possible commission of a federal offense.
Criminal liability whistleblower protection
Makes it a crime to knowingly, with the intent to retaliate, take any harmful action against a person for providing truthful information relating to the commission or possible commission of a federal offense.
Criminal liability whistleblower protection
What are 3 enhanced penalties for White-Collar Crime
- Securities fraud
- Freezing of assets
- Document destruction
Deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users.
Financial statement fraud
What are 3 costs of financial statement fraud?
- Legal costs
- Loss of productivity
- Loss of customer goodwill
What are 3 things that financial statement fraud bring?
- Regulatory oversight
- Doubt in efficacy of operations
- Destroy public confidence
Recording income from goods or services that did not occur.
Fictitious revenues
Recording revenue and/or expenses in improper periods.
Timing differences
Liability and expense omissions. Capitalized expenses as well.
Concealed liabilities
Liability omissions, subsequent events, etc. Not explaining negative issues with the company.
Improper disclosures
What 4 things are involved with improper asset valuation?
- Inventory valuation
- Accounts payable
- Business Combinations
- Fixed assets
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether cause by error or fraud.
Consideration of fraud in a financial statement audit (Au 240)
What are the 2 characteristics of fraud involved in public companies? (Misstatements)
Misstatements arising from:
1. Fraudulent financial reporting
2 Misappropriation of assets
Obtaining information needed to identify _____ of material misstatement due to ________.
- Risks
- fraud
What are the 4 attributes of risk to identify?
- Type
- Significance
- Likelihood
- Pervasiveness
What are the 3 results to respond to after an assessment?
- RMM
- NET
- Override of controls risk
What are the 3 things we need to reduce to help deter financial statement fraud?
- Pressures
- Opportunity
- Rationalization
Analyzes RELATIONSHIPS between ITEMS on an income statement, balance sheet, etc.
Vertical analysis
Analyzes the percentage CHANGE in individual financial statement items.
Horizontal analysis
Measures the RELATIONSHIP between two different financial statement amounts.
Ratio analysis
Employee, manager, or executive has a _____ ___ ______ or personal interest in a transaction that adversely affects the company.
Conflicts of Interest
What are two examples of purchasing schemes?
- Overbilling
- Turnaround sales
The employee knows that the company is seeking to purchase a particular asset and purchases it himself. Then, sells it to the company at a higher price.
Turnaround sales
Goods are sold below fair market value to a customer in which the perpetrator has a hidden interest.
Underbilling
Purchases are made from the victim company and credit memos are later issued.
Writing off sales
