Fraud Examination

Chapter 12
Revenue and Inventory Related
Financial Statement Frauds

Albrecht, Albrecht, Albrecht, Zimbelman

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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.

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Learning Objectives

Identify revenue-related financial statement fraud

schemes.
List ways to search for 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.
Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Learning Objectives

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.

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Revenue-Related Fraud
Schemes
Two reasons for the prevalence of revenue-
related financial statement fraud:

 The availability of acceptable alternatives for

recognizing revenue

 The ease of manipulating net income using revenue

and receivable accounts

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Revenue-Related Fraud
Schemes
Common Revenue-related Fraud Schemes:
Related-party transactions
Sham sales
Bill-and-hold sales
Side agreements
Consignment sales
Channel stuffing
Lapping or kiting
Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Revenue-Related Fraud
Schemes
Common Revenue-related Fraud Schemes:
Redating or refreshing transactions
Liberal return policies
Partial shipment schemes
Improper cutoff
Round-tripping
All of these fraud schemes result in overstated
revenues and overstated net income.
Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identifying Revenue-Related
Fraud
Six Categories
1. Analytical symptoms
2. Accounting or documentary symptoms
3. Lifestyle symptoms
4. Control symptoms
5. Behavioral and verbal symptoms
6. Tips and complaints

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Inventory & Cost of Goods
Sold Frauds

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Inventory & Cost of Goods
Sold Frauds

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Analyzing Financial
Statements

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license