chapter 12

What are the two most commonly manipulated accounts in financial statement fraud?

Revenues and accounts receivable

What is the most common way revenue fraud is perpetrated?

Recording fictitious revenues

What is the second most common revenue fraud scheme?

Recording revenues prematurely (improper cutoff)

Why is revenue recognition an area prone to fraud?

It requires significant judgment and has many acceptable alternatives

What is a common method of inflating net income using revenue?

Creating fictitious revenue and receivables

What are some examples of revenue manipulation schemes?

Premature revenue recognition, fictitious customers, forged contracts, topside journal entries

How can understanding revenue transactions help detect fraud?

It allows auditors to analyze how transactions could be misstated

What are common revenue fraud schemes?

Sham sales, bill-and-hold, channel stuffing, consignment sales, round-tripping

What are analytical symptoms of revenue fraud?

Unusual ratios, revenue too high, low returns or discounts, growing receivables, unusual adjustments

What are documentary symptoms of revenue fraud?

Missing documents, nonstandard entries, only photocopies available, round-dollar entries

What are control symptoms of revenue fraud?

Override of controls, unapproved customers, weak cutoff processes

What are behavioral/verbal symptoms of revenue fraud?

Vague or inconsistent responses, access denied, unusual delays, suspicious behavior

What are lifestyle symptoms of revenue fraud?

Large stock sales, bonuses tied to revenue, exec wealth in stock

What is a proactive way to search for revenue fraud symptoms?

Analyze account relationships and compare with external data

What is the fraud triangle?

Pressure + Rationalization + Opportunity

Why is inventory frequently manipulated in fraud?

Because it affects cost of goods sold and net income

What happens if ending inventory is overstated?

COGS is understated, net income is overstated

What are common inventory fraud schemes?

Double counting, improper cutoff, overestimating inventory, consignment issues

What are analytical symptoms of inventory fraud?

Inventory too high, COGS too low, purchase values inconsistent with inventory

What are documentary symptoms of inventory fraud?

Unsupported entries, missing or photocopied docs, mismatched inventory records

What are control symptoms of inventory fraud?

Management override, new unapproved vendors, weak inventory counts

What are behavioral/verbal symptoms of inventory fraud?

Evasive answers, delays, unusual pressure, inconsistent stories

What lifestyle signs may indicate inventory fraud?

Same as revenue fraud: sudden wealth, bonuses, stock sales

What should fraud investigators do when predication exists?

Initiate an investigation if conditions warrant

How can software help detect accounting fraud?

By identifying unusual journal entries and comparing them to norms (e.g., Benford's law)