Certified Fraud Examiner

Financial Transactions and Fraud Schemes

What is the Accounting Equation?

Assets = Liabilities + Owners' Equity

What is Accounting?

The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results for an enterprise's decision-makers and other interested parties.

What is an Asset?

A resource owned by an entity that has economic value and will provide a future benefit.

what are some typical Asset Accounts?

Cash, Accounts receivable,
Inventory,
Property,
Equipment,
Intangible items (e.g., patents, licenses, and trademarks).

What are Liabilities?

The obligations of an entity or outsider's claims against a company's assets.

what are some typical Liability Accounts?

Accounts payable,
Notes payable,
Interest payable,
Long-term debt.

What is Owners' Equity

The investment of a company's owners plus accumulated profits (revenues minus expenses).

Debit Entry

The type of entry that goes on the left side of an account.

Credit Entry

The type of entry that goes on the right side of an account.

what type of Accounts are Increased by Debits and decreased by credits

Assets and Expenses.

what type of Accounts are Increased by Credits and decreased by debits?

Liabilities, Owners' equity, Revenue.

Journal Entry

An accounting record consisting of a debit side and a credit side that shows the detailed components of a particular transaction.

Two Primary Methods of Accounting

Cash basis and Accrual basis.

Financial Statements

Presentations of financial data and accompanying notes prepared in conformity with generally accepted accounting principles.

What is Balance Sheet (or statement of Financial position)?

A financial statement that provides insight into a company's financial position at a specific point in time.

What accounts are typically found on a Balance Sheet

Assets, Liabilities, Owners' equity.

What is an Income Statement (or statement of profit or loss and other comprehensive income)?

A financial statement that shows how much profit (or loss) a company earned over a period of time.

What is Gross Profit (also called gross margin)?

Net sales minus cost of goods sold.

What is Net Profit?

Gross profit minus operating expenses.

What is Gross Revenue

Total sales during an accounting period before any deductions are made.

What Items are typically on an Income Statement

Net sales revenue,
Cost of goods sold,
Gross profit (or gross margin),
Operating expenses (depreciation, interest, rent, utilities, salaries, etc.),
Net profit/income or net loss.

What is the Statement of Changes in Owners' Equity (or statement of retained earnings)?

A financial statement that acts as the connecting link between the income statement and balance sheet by detailing the change in owners' equity over a period.

What is the Statement of Cash Flows

A financial statement that reports a company's sources and uses of cash during the accounting period.

3 Categories on a Statement of Cash Flows

Cash flows from operating activities,
Cash flows from investing activities,
Cash flows from financing activities.

What is GAAP

Generally Accepted Accounting Principles, which are rules by which a company’s financial transactions are recorded into their appropriate account classifications

Net sales revenue

The total revenue from sales of goods or services after deducting returns, allowances, and discounts.

Cost of goods sold

The direct costs attributable to the production of the goods sold by a company.

Gross profit (or gross margin)

The difference between net sales revenue and cost of goods sold.

Operating expenses

Expenses required for the day-to-day functioning of the business, including depreciation, interest, rent, utilities, salaries, etc.

Net profit/income or net loss

The total revenue minus total expenses, which can result in a profit or a loss.

Cash flows from operating activities

Cash flows that result from the primary revenue-generating activities of the business.

Cash flows from investing activities

Cash flows that result from the acquisition and disposal of long-term assets and other investments.

Cash flows from financing activities

Cash flows that result from transactions with the company's owners and creditors.

What is GAAP

Generally accepted accounting principles, which are the rules by which a company's financial transactions are recorded into their appropriate account classifications.

What is IFRS

International Financial Reporting Standards, which is one form of GAAP and is intended to be used as a uniform set of globally accepted accounting standards.

Qualitative characteristic of relevance under IFRS

Any information that might affect a decision made by a user of the financial statements is considered relevant.

Matching principle

Expenses are recorded in the same accounting period as the revenues they helped generate.

Qualitative characteristic of comparability under IFRS

Comparability enables users to understand and base their decisions on comparisons between different entities and on similar information from a single entity for another reporting period.

Qualitative characteristic of verifiability under IFRS

Verifiability helps assure users that information is accurate and faithfully represents the entity's financial position.

Qualitative characteristic of timeliness under IFRS

Providing information to decision-makers in time to be capable of influencing their decisions.

Qualitative characteristic of understandability under IFRS

Enough information should be provided about the organization's economic events so that a reasonable financial statement user can understand what occurred.

Qualitative characteristic of faithful representation under IFRS

Every effort shall be made to ensure that the financial information presented is complete, neutral, and free from error.

Recognition of an element

An item that meets the definition of an element should be recognized when there is probable future economic benefit that will flow to or from the entity and the item has a cost or value that can be measured with reliability.

What is the Going concern principle

The underlying assumption that the life of the entity will be long enough to fulfil its financial and legal obligations; any evidence to the contrary must be reported in the entity's financial statements.

When is a Departure from GAAP acceptable?

when there is concern that assets or income would be overstated and expenses or liabilities would be understated,
it is common practice in the industry,
the substance of the transaction is better reflected a different way, following GAAP will produce misleading financial statements and the departure is properly disclosed,
the transaction is immaterial to the financial statements, or the expected costs of following GAAP exceed the expected benefits of compliance.

what is Depreciation expense

an expense recorded to reflect the expected decline of a company’s physical property from normal use; it is recorded on the income statement as an operating expense

what is Amortization expense

An expense taken for a decline in value of the intangible property; it is recorded on the income statement as an operating expense.

what is Accumulated depreciation

An amount that represents the cumulative expense recorded to reflect the expected decline of a company's physical property from normal use; it is recorded on the balance sheet as an offset to the company's fixed assets.

what is Accumulated amortization

An amount that represents the cumulative decline in value of the company's intangible property; it is recorded on the balance sheet as an offset to the company's intangible assets.

what is Financial statement fraud

The deliberate misrepresentation of the financial condition of an enterprise through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive users.

what is the typical Effect of fraud on financial statements

Overstated assets and revenues; Understated liabilities and expenses.

What is Fictitious revenue scheme

Recording revenue from the sale of goods or services that did not occur, involving either fake customers or legitimate customers.

what is a Timing difference scheme

Recording of revenues or expenses in improper periods.

what is Income smoothing

Moving revenues or expenses between 1 period and the next to increase or decrease earnings as desired and give the illusion of a more stable enterprise.

4 classifications of Improper asset valuation schemes

Inventory valuation, Accounts receivable, Business combinations, Fixed assets.

What is Bad debt expense

The amount of accounts receivable that the entity does not expect to collect.

What does it mean to Improperly capitalize an expenditure

To add the cost of the expenditure to an asset account rather than properly recording it as an expense.

what is the Effect of improperly capitalizing an expenditure

An increase in assets (and therefore a stronger balance sheet) and a decrease in expenses (and therefore a higher net income) for the period.

What is a Contingent liability

A potential obligation that will materialize only if certain events occur in the future.

3 Types of accounting changes that must be disclosed

Changes in accounting principles, Changes in accounting estimates, Changes in reporting entities.

What is Vertical analysis

A technique for analyzing the relationship among the items on the financial statements during a specific accounting period by expressing components as percentages of a specified base value

what is Vertical Analysis

A technique for analyzing the relationships among the items on the financial statements during a specific accounting period by expressing components as percentages of a specified base value.

What is gross revenue

Total sales during an accounting period before any deductions are made

What is Horizontal Analysis

A technique for analyzing the percentage change in individual line items on a financial statement from one accounting period to the next.

what is Ratio Analysis

A means of measuring the relationship between any 2 different financial statement amounts.

what is the calculation of the Current Ratio

Current assets / current liabilities.

What does the Current Ratio Measurement

A company's ability to meet present obligations from its liquid assets.

what is Quick Ratio

(Cash + marketable securities + receivables) / current liabilities.

What does the Quick Ratio Measure?

The company's ability to meet sudden cash requirements.

what is the calculation of Asset Turnover Ratio

Net sales / average assets.

what does the Asset Turnover Ratio Measure?

The efficiency with which asset resources are used.

Debt-to-Equity Ratio

Total liabilities / total equity.

Debt-to-Equity Ratio Measurement

The relationship between the company's total debt and the owners' financial contributions plus earnings to date.

What is the calculation of the Accounts Receivable Turnover Ratio

Net sales on account / average net receivables.

What does Accounts Receivable Turnover Ratio Measure

The number of times accounts receivable is turned over during the accounting period (i.e., a firm's effectiveness in extending credit and in collecting debts on that credit).

2 types of Cash Receipts Schemes

Skimming and Cash larceny.

What is Skimming

An off-book fraud that involves the removal of cash from a victim entity prior to its entry into an accounting system.

What is an Unrecorded Sales Skimming Scheme

When an employee keeps the cash received from a customer in a sales transaction and makes no record of the sale.

What is an Understated Sales Skimming Scheme

When a legitimate sales transaction is recorded, but the employee records the sale for a lower amount and keeps the remainder.

What is a Receivables Skimming Scheme

Instead of applying a customer's payment to the customer's account, the employee steals the payment so that the customer's account appears delinquent.

What is Receivables Lapping

A method used to conceal receivables skimming by taking an incoming customer payment and applying it to an account that was stolen from, then taking the next incoming payment and applying it to the previous account, and so on.

What types of Journal Entries should be Examined when looking for a Skimming scheme?

False credits to inventory, Write-offs of lost, stolen, or obsolete inventory, Write-offs of accounts receivable, Irregular entries to cash.

what is a Cash Larceny Scheme

An on-book fraud scheme in which an employee physically misappropriates cash that that has already appeared on the victim organization’s books.

On-book fraud scheme

An on-book fraud scheme in which an employee physically misappropriates cash that has already appeared on the victim organization's books.

what is Deposit lapping

A method used to conceal a cash larceny scheme by stealing the cash from a deposit, replacing it with the next day's deposit, repeating the same procedure the next day, and so on.

Fraudulent disbursement scheme

A distribution of company funds for a dishonest purpose.

Register disbursement scheme

Stealing cash from the register while recording its removal as a legitimate transaction.

2 Types of register disbursement schemes

False refunds and false voids.

what is Fictitious refund scheme

A scheme in which the cashier processes a transaction as if a customer were returning merchandise, even though there is no actual return, and then takes cash from the register in the amount of the false return.

Effect on inventory in a fictitious refund scheme

Inventory is overstated by the amount of the fictitious refund.

What is Overstated refund scheme

A scheme in which an employee overstates the amount of a legitimate refund and keeps the excess money.

3 Types of billing schemes

False invoicing via shell companies, false invoicing via nonaccomplice vendors, and personal purchases with company funds.

what is Shell company

A business entity with no physical presence or employees that generates little (if any) independent economic value.

What is a Pass-through scheme

When an employee in the purchasing department sets up a shell company, buys merchandise through the shell company, and sells it back to their employer at an increased price.

What is a Pay and return scheme

When an employee intentionally sends an incorrect payment to a legitimate vendor, requests that the vendor return the payment, and intercepts and keeps the returned payment.

Personal purchases with company funds

When an employee orders goods that are unnecessary to their employer and keeps the goods for themselves.

3 Categories of payroll fraud

Ghost employee schemes, falsified hours and salary schemes, and commission schemes.

What is a Ghost employee

A real or fictitious person on the payroll who does not work for the victim company.

4 Requirements for a ghost employee scheme

The ghost must be added to the payroll, timekeeping and wage rate information must be collected, a paycheck must be issued to the ghost, and the check must be delivered to the perpetrator or an accomplice.

Ways hourly employees can fraudulently inflate pay

Falsify the number of hours worked and increase their rate of pay.