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Forensic Accounting > Midterm 1 > Flashcards

Midterm 1 Flashcards

1
Q

SBU

A

Strategic Business Unit

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2
Q

The first person who mentions a number

A

loses

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3
Q

What do they say in New York

A

tough

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4
Q

Rick Edelmen

A

The truth about money

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5
Q

What are you left with

A

Pennies on the dollar

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6
Q

What was the issue with the FSU library abuse

A

lack of supervision

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7
Q

What is a cookie Jar

A

This is a hidden reserve. This is when you overstate your liabilities and understate assets. This creates the hidden reserve that you can use later to smooth out earnings

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8
Q

What are misappropriation Schemes

A

false or misleading records or documents used to circumvent I/C

more common than corruption or cooking teh cooks

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9
Q

What is white collar crime

A

learned behavior .

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10
Q

Is it easy to find fraud

A

no - still very hard to find and eliminate

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11
Q

What does an embezzler look like

A

They are the nicest people in the world -look like innocent people

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12
Q

How do frauders start

A

With baby step and then it grows over time

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13
Q

What are methods of detecting economic crime

A 
tip off 
management review
whistleblowing or hotline
accident
Internal audit
suspicious superior
Internal Control
external audit
self reported
data analytics
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14
Q

What is the difference between embezzlement and larceny

A

Larceny is theft - it was never in your possession

embezzlement is when you steal from you employer

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15
Q

What is larceny of cash

A

this is theft of cash AFTER is has been recorded on the books like from petty cash or a cash register

Prevent - segregation o duties and counting the money a second time

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16
Q

Skimming

A

this is off the books

It is when you take the money before it is entered on the books

unrecorded sales
understated sales
ringing no sale
theft of incoming checks

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17
Q

Swapping checks for cash

A

you take cash but leave a personal check in case of an audit but then later removes the check before it is cashed

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18
Q

Check tampering

A

This is check washing

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19
Q

Kiting

A

This is when you build up balances in between two account by drawing off of one and not recording but recognizing the deposit. You are floating ( kiting ) money between accounts.

Use a cutoff statement to catch

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20
Q

Lapping

A

Robbing Peter to Pay Paul. This is when you take money from an account and later replace it with the cash from another customer. The process repeats

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21
Q

Account receivable fraud

A

This is when you have a phony receivable that you can later write off

Or you can put up the AR as collateral for a loan

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22
Q

Inventory Fraud

A
  • Short shipments
  • Steal inventory
  • Shoplifting
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23
Q

A/P fraud

A

This is duplicate payment - 2%

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24
Q

Doctored Sales figures

A

Unrecorded sales
Understated Sales
Creating fictitious Sales
padding prices to increase commissions

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25
Q

Sham payments

A

multiple payment, ghosts on payroll, shell companies, bogus refunds

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26
Q

bid rigging

A

felony - can go into cahoot to fix a bid

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27
Q

What is fraud

A

usually must have scienter - intent fraudulent intent is present.

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28
Q

external auditors and fraud detection

A

They are usually have a poor record of uncovering fraud. - why because they trust that the segregation of duties will prevent fraud and it doesn’t always.

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29
Q

Audit committee

A
  • must be independent
  • must be directly involved with audit firm
  • establish procedure to report fraud - like a hotline
  • authority and money to do their job
  • one must have an accounting background
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30
Q

Board of Directors role

A

red flags - if insiders have greater than 50% control of board
- CEO is also chairman
- CEO is the founder
Lack of an audit committee

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31
Q

Management role

A

CEO and CFO certify:

  • they have reviewed the report
  • reported fairly in all material respects
  • they are responsible for establishing and maintain internal control - evaluate it 90 day before the report
  • report any deficiencies in I/C that they see
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32
Q

White collar crime is a division in the FBI

A

It is defined as lying, cheating and stealing

  • bank fraud and embezzlement
  • election fraud
  • corporate fraud
  • mortgage fraud
  • securities and commodities fraud
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33
Q

SOX

A

established PCAOB

  • auditors must be independent from their clients
  • protection for whistleblowers
  • CEO must sign the corporate tax return
  • 20 year prison term for mail and wire fraud
  • public companies must have an audit committee
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34
Q

Why is forensic accounting such a hot topic today

A
  • automation changed the business landscape.
  • in 1980 the number and speed of business transactions required a faster means of to create and audit financial statements
  • became impossible to audit every transaction because there were so many
  • Internal control, sizing risks, and sampling became the focus.
  • unethical mangers learned to skirt the internal controls
    -Thus the need for forensic accountants
    -
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35
Q

Esforms Miami Healthcare scandal

A

Cycled thousands of medicare and medicaid beneficiaries through his network when they didn’t qualify for such care.

  • gave them drugs
  • 1 Billion in losses
  • kickbacks
36
Q

accounting fraud rates

A

Have tripled since 2003

37
Q

percent of losses from type of fraudsters

A

-42% from internal fraudsters
43% - internal and external
25% - external fraudsters

38
Q

What percent of companies fall victim to fraud

A

75%

39
Q

What countries are considered teh most corrupt

A

Denmark and New Zealand

US - 18

40
Q

What countries are worst for financial secrecy

A

1 - switzerland
2 - Hong Kong
3. US

41
Q

What are the three m’s of financial reporting fraud

A

manipulation - altering accounting records
misrepresentation - intention omissions
misapplication - intention misapplication of accounting records

42
Q

fraudulent financial reporting

A

Fraud financial statements are a small amount of fraud schemes - but have a major economic wallop.

43
Q

Ficticuous or over stated revenue

A

overstate income. fictitious revenue to overstate income

  • omitting elements that would lower actual revenue
  • using mark to market to make records more flexible
44
Q

fictitious reductions of expenses and liabilities

A
  • lowering of expenses

world com- shifted line cost items into capital accounts which increased income

45
Q

Premature Revenue Recognition

A

recording income as actual to inflate earnings when sales are not complete-

Xerox inflated revue by accelerating revenue recognition of leases of their copiers too early in their cycle

46
Q

Misclassified Revenues and Assets

A

intentionally misclassifying securities t transferring securities to a different class that would trigger the recognition of a gain or postpone the recognition of a loss.

HTM vs. TS

47
Q

Overvalued assets or undervalued expenses and liabilities

A

Overvalue assets that are unsupported - can be done to pay off parties-or for own company gain

accounts receivables offer many opportunities for valuation schemes

48
Q

What is gain on sale accounting

A

use of SPE to purchase or sell overvalued ventures at unsupported values.

49
Q

Omitted Liabilties

A

opposite of fictitious revenue and assets - this is done to hide negative numbers

Using SPE to buy poorly performing assets to hide the loss

50
Q

omitted or improper disclosures

A

avoid listing questionable or bad news on the balance sheet

51
Q

equity or security fraud

A

promotion or sale of non existent of illegal securities

52
Q

Related party transactions

A

enron did many related party transactions through the special p unis.

53
Q

minimizing or income or inflating expenses to reduce tax liabilities

A

stretch deductions or overstate expenses to reduce tax liability - this is evasion not avoidance

54
Q

financial shenanigans

A

record revenue before it is earned
creating fictitious revenue
boosting profits with non recurring transactions
shifting current expense to a later period
failing to record or disclose liabilities
Shifting current income to a later period
Shifting future expenses to an earlier period.

55
Q

what are the three legs of the fraud triangle

A

pressure, rationalization, and opportunity

56
Q

what is the most essential part of managing risk

A

Internal controls. the lack of good internal controls opens the doors to fraud

57
Q

What are the characteristics of white collar crime

A
  • educated, married, religious, no arrest record, could be employed for a long time. could be old or young - look like everyone else
58
Q

how do forensic accountant typically find problems

A

They comb through corporate books looking for oddities that could signal swindles

there is a thin line between legal earning management and abusive earning management

59
Q

What about fraud

A

It is not necessarily only about stealing assets to falsifying financial statements. they can be about pressures in other ways like lying about school rankings

60
Q

what are the three B of fraud

A

Babes Booze and bets

61
Q

preventive , corrective, or detective

employee training
bank reconciliations
password control
surprise cash counts
insurance
job rotation
counting inventory
A 
corrective
detective
preventive
detective
corrective
preventive
detective
62
Q

What about Internal Auditors and fraud detection

A

the assist in the control of fraud be by examining the effectiveness of the internal control system

they must consider the possibility of material irregularities or non compliance during an internal audit

63
Q

What must an internal auditor do if they discover fraud

A
  • notify management or the board

- create a written report

64
Q

What is the forensic accountants role

A

they are sleuths
they perform a separate investigation
they must be skeptical
they must assume that the financial statement might be wrong
they will note small errors and irregularities

65
Q

What are the financial statement fraud categories

A

Overstated revenues
Management estimates
Maskign reduced cashflows
Look at capitalized accounts - EBITDA
Excessive debt
Inventory problems
CPA Problems - use a single auditor or a lot of switching
Hyped sales
Off balance sheet items - off shore accounts SPE
Big Bath
Balance sheet account problems - hide dent or liabilities 9 use the equity method rather the HTM or

66
Q

What is the big bath

A

making write off directly against earnings - the result is the profits are depressed for a couple of years but future earning will look much better

67
Q

What are pension plan problems

A

you can underfund these and the pension fund investment can inflate a companies bottom line.

68
Q

What are some example of off balance sheet fraud

A

using SPE - this is what Enron did to mask problems in sales and expenses

69
Q

What can you do to the balance sheet

A

hide debts and liabilities by:

using the equity method for investments rather than TS or HTM
Leasing accounts - saying they are operating leasing
Pension accounting - netting PBO and pension assets
Hiding debt inside special purpose entities

70
Q

How do you use barter deals -

A
  • internet companies use barter or non cash deal to increase their revenue
71
Q

What are financial fraud detecting tools

A 
by accident
interviewing officers and witnesses
percentage analysis -  horitonzal (across time) and vertical ( common size percents) 
ratio analysis
checklists
tips
surveillance
undercover operations
72
Q

materiality

A

the impact of the misstate does not impact the financial statement sas a whole

73
Q

control risk

A

this is the risk that a company’s internal control system will not catch a material error

74
Q

detection risk

A

This is the risk that the auditor will not find the material error

75
Q

Inherent risk

A

This is the risk that there is an error in the f/s that si not due to fraud - transaction are complex or require judgment

76
Q

misappropriation schemes

A

more common than corruption and cooking the books and less costly

they are false or misleading records or documents because of the circumvention of internal controls

77
Q

What do we know about employee fraudsters

A

They look like everyone else

78
Q

How does employee fraud start

A

with baby steps that serve to tex the system and then get bigger

79
Q

what is money laundering

A

take money from one source and hide the source so you can use them without legal restrictions or penalties

80
Q

What does a fraud risk assessment have - 3 elements

A
  • identify the inherent fraud risks
  • assess the likelihood of the inherent fraud risk
  • respond to reasonably likely and significant inherent and residual fraud risk
81
Q

The fraud risk assessment process

A 
Organize the assessment
Determine area to assess
Identify potential schemes and scenarios
Assess likelihood of fraud
Assess significance of risk
Link antifraud controls
Apply assessment results
82
Q

What are the two types of fraud investigation: proactive and reactive

A 
proactive - is better include:
- effective internal control
-financial and operational audits
Intelligence gathering
- Logging of exceptions
- reviewing variances

Reactive:

  • investigating complaints an allegations
  • intuition and suspicion
83
Q

What can a company do to stop fraud

A
  • have a hotline
  • have a mandatory vacation policy
  • rotate assignments
  • have a written and signed ethics policy
  • shift duties of internal auditors
  • look for lifestyles changes of employees
  • surprise audits
  • in small business owner receives the bank statement s un opened
  • bank statements should eb always reconciled
  • think like criminals
  • dont assume employees are honest
  • count cash twice
  • bond employees
  • ## use fraud risk assessments
84
Q

What can a manger do to prevent fraud

A
  • count petty cash twice a day
  • investigate suppliers to see if there are victiciosu vendors
  • investigate customers
  • examine endorsements in canceled checks
  • add up the A/R subsidiary
  • match payroll to medical insurance to catch ghosts
  • match payroll to address to catch multiple person at one address
  • look for document alternations
85
Q

Where do you look for fraud symptoms

A

source documents
journal entries
accounting ledgers

86
Q

Approach to fraud

A

1 - find the fraud
2 - how was the fraud committed
3 - set up system to stop fraud from happening again

87
Q

Weapons in the fight again fraud

A
  • implement string financial controls
  • managemt closely look at monthly financial statements
  • tone at the top - to encourage ethical conduct
  • have a fraud hotline
  • CFOS should only work in one company
  • Audit firm not have once employees
  • use two signature check writing system
  • question any discrepancy
  • auditors not accept gifts from clients
  • notes any lifestyle upgrades
  • verify cash in bank accounts

Forensic Accounting (6 decks)

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