Today’s TopicsGeneral Detection ModelRevenue FraudsRevenue Fraud DetectionInventory FraudsInventory Fraud DetectionLiability FraudLiability Fraud DetectionOther Asset FraudOther Asset Fraud DetectionInadequate Disclosure FraudDisclosure Fraud DetectionFinancial Fraud DetectionTransparency is KeyFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-1Today’s TopicsRevenue FraudsInventory FraudsLiability FraudsOther Asset FraudsDisclosure FraudsFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-2General Detection ModelPeriod to period account balance analysisPeriod to period relationship analysisComparison with industry averagesComparison with physical assetsGeneral horizontal and vertical analysisFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-3Revenue FraudsShenanigans #1 and #2Tables pps. 403-405Revenue cycleSell goods or servicesEstimate collectibilityReturnsWrite-offsCollect cashFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-4Revenue Fraud DetectionDetectionAccounting anomiliesRatios (p.408)FORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-5Inventory FraudsShenanigan #4Tables pps. 416-417Inventory cyclePurchase inventoryReturnsPaymentSell inventoryWrite offsEstimate or count inventoryValue inventoryFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-6Inventory Fraud DetectionDetectionStatement of cash flowsComparison with physical assetsRatios (p.421)FORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-7Liability FraudShenanigan #5Table p. 449Liability cyclePurchase goods and servicesIncur accrualsSell goods and servicesBorrow moneyPayments on accountAssess contingenciesFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-8Liability Fraud DetectionTypesUnderstatementUnearned revenueOmission of debt and contingenciesDetectionAccounting anomiliesRatios (p.455)FORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-9Other Asset FraudShenanigan #4Chart-p. 458 Table-p. 464TypesOverstatementImproper capitalizationUnderstated write offsFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-10Other Asset Fraud DetectionDetectionAccounting anomiliesRatios (pps. 465-469)FORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-11Inadequate Disclosure FraudMisrepresentationCompany and its productsVia financial reportsVia footnote disclosuresFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-12Disclosure Fraud DetectionDetectionKTTQuestions on pps. 473-477Use common senseCompare footnotesVigorous use of inquiriesGo outside the box!Fraud Buster Ratio(NI - CFO)/Total Assets; should approach zeroCondition worsens as result growsFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-13Financial Fraud DetectionKTT is the keyNote audit related procedures C12 & C13-Appendix AUse the Fraud Exposure RectangleManagement & DirectorsBackground, motivation & influenceCompany relationshipsObligations, related party transactions & complianceNature of organization & industryFinancial results & operationsGAAP, attitudeFORENSIC ACCOUNTING - BA124 – Spring 2012 Slide 18-14Transparency is KeyAre the #s telling the story or making the story?Is the company managing the business or managing the #s?What is, is? versus What is. Is!Recall SFAC #1, now #8Improved decision makingInsight into future cash flowsResource