2016 Cengage Learning All Rights Reserved May not be scanned copied or duplicated or posted to a publicly accessible website in whole or in part This chapter focuses on revenueand inventoryrelated financial statement frauds Specifically it focuses on identifying financial statement fra ID: 358206
Download Presentation The PPT/PDF document "Chapter 12: Revenue- and Inventory-Relat..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Fraud Examination
Fifth Edition
Chapter
12Revenue- and Inventory-Related Financial Statement Frauds
© 2019 Cengage
. All rights reserved
.Slide2
To the Student
This chapter focuses on revenue-and inventory-related financial statement frauds. Specifically, it focuses on identifying financial statement fraud exposures. While doing this, it is important to focus on transactions and accounts that are affected by and correspond with the potential frauds.
This chapter also discusses fraud symptoms that may exist and how to actively search for these fraud symptoms. Finally, the chapter addresses ways to follow up on symptoms observed that pertain to both revenue-and inventory-related financial statement frauds. Slide3
Learning Objectives
Identify revenue-related financial statement fraud schemes.
List ways to search for symptoms of revenue-related financial statement fraud.Understand the importance of, and ways to follow up on, revenue-related fraud symptoms.Discuss inventory-related financial statement fraud schemes.Identify ways to search for inventory-related financial statement fraud symptoms.Explain the importance of, and ways to follow up on, inventory-related fraud symptoms.Slide4
Revenue-Related Fraud Schemes (1 of 3)
Two reasons for the prevalence of revenue-related financial statement fraud:
The availability of acceptable alternatives for recognizing revenueThe ease of manipulating net income using revenue and receivable accountsSlide5
Revenue-Related Fraud Schemes (2 of 3)
Common Revenue-Related Fraud Schemes:
Related-party transactionsSham salesBill-and-hold salesSide agreementsConsignment salesChannel stuffingSlide6
Revenue-Related Fraud Schemes (3 of 3)
Common Revenue-Related Fraud Schemes:Lapping or kiting
Redating or refreshing transactionsLiberal return policiesPartial shipment schemesImproper cutoffRound-trippingAll of these fraud schemes result in overstated revenues and overstated net income.Slide7
Identifying Revenue-Related Fraud
Six Categories
Analytical symptomsAccounting or documentary symptomsLifestyle symptomsControl symptomsBehavioral and verbal symptomsTips and complaintsSlide8
Inventory & Cost of Goods Sold Frauds (1 of 2)
INCOME STATEMENT
WHEN INVENTORY IS OVERSTATED,
THENGross Revenues (Sales)
Are not affected
− Sales Returns
Are not affected
− Sales Discounts
Are not affected
=
Net Revenues (Sales)
Are not affected
− Cost of Goods Sold
Is understated
= Gross Margin
Is understated
− Expenses
Are not affected
=
Net Income
Is overstatedSlide9
Inventory & Cost of Goods Sold Frauds (2 of 2)
COST OF GOODS SOLD CALCULATION
PERIOD 1, OVERSTATEMENT OF ENDING INVENTORY
PERIOD 2
Beginning Inventory
Not affected
Overstated
+ Purchases of Inventory
Not affected
Not affected
− Returns of Inventory to
Vendor
Not affected
Not affected
− Purchase Discounts on
Inventory Purchases
Not affected
Not affected
=
Goods Available
for
Sale
Not affected
Overstated
− Ending Inventory
Overstated
Not affected
= Cost of Goods Sold
Understated
OverstatedSlide10
Analyzing Financial Statements
Analyzing financial balances and relationships
within financial statements
Look for unusual changes in inventory and cost of goods sold account balances
from period to periodLook for unusual changes in inventory and cost of goods sold relationships
from period to period
Comparing financial statement amounts or relationships with other information
Compare financial results and trends of the company with those of
similar firms
in the same industry
Compare recorded amounts in the financial statements with nonfinancial statement amounts