PERSONAL ASSIGNMENT
FRAUD AUDIT
By : NIMAS KARTIKA DEWI
QUESTIONS AND CASES
QUESTIONS
1. What are some common revenue-
related financial statement fraud
schhemes?
2. What are some possible ways to
proactively search for revenue related
financial statment fraud schemes?
3. Why is it important to follow up
revenue related fraud symptoms
4. What are some of the most common
inventory-related financial statement
fraud schemes?
5. What are some ways to proactively
search for inventory-related financial Look for unusual changes in the inventory and
statement fraud schemes?
ANSWER
Fictitious sales, recognizing revenues too early,
overstating real sales, understating the allowance
for doubtful accounts, not recording returned goods
from customers, not writing off uncollectible
receivables
Analyze financial balances and relationships
within the financial statements, compare financial
statement amounts and relationships with
nonfinancial statement amounts, compare
balances and relationships with those of similar
firms in the same industrie
Because we will never know for sure if fraud is
occurring without additional follow-up.
Recording purchases too late, not recording
purchases, overstating purchase returns, recording
purchase returns in an earlier period than when
actually returned,not writing off or writing down
obsolete inventory, over-counting inventory,
cost of goods sold account balances from period
to period, looking for unusual changes in
inventory and cost of goods sold relationships
from period to period, company with those of
 similar firms

6. What are common-size financial Balance sheets and income statements converted
statements? to percentages

7. Why do you suspect the revenue-
related financial statement fraud
schemes are most common and
inventory-related fraud schemes are
next most common?
Debiting Accounts Receivable and crediting
Revenues and you have increased assets,
revenues, and income, Inventory and cost of
goods sold frauds are also common because they
are also easy to perpetrate.

8. What is the effect on net income of Total revenues and net income are overstated.
not recording sales return?

9. What is the effect on net income of Cost of goods sold is understated, with gross
overstating ending inventory? margin and net income becoming overstated.

10. How can comparing statement When we compare financial statement amounts
amounts with actual asstes help with actual amounts, it usually makes the
determine if fraud is present? numbers become much more real.

TRUE/FALSE

STATEMENTS TRUE/FALSE
1. Understated revenues and understated net income are
among the most common types of financial statement False
fraud.

2. Two of the reasons revenue-related financial statement

fraud is so prevalent are because revenue recognition can True
be highly subjective and because revenue is so easily
manipulated.

3. Performing a horizontal analysis of the statement of cash

False
flows is an excellent way to proactively search for
revenue-related financial statement fraud.
True
4. The most common accounts manipulated when
perpetrating financial statement fraud are revenues and/or
 accounts receivable.

5. An increase in gross margin and an increase in number

True
of days sales in inventory could be an indication of
inflated inventory fraud.

6. A sales discounts amount that appears too low could True

be a fraud symptom.

7. Comparing financial results and trends of a company

with those of similar firms is an ineffective way to look False
for fraud symptoms

8. Focusing on changes in financial statements from period True

to period can help identify analytical fraud symptoms

9. Controls over inventory should be closely examined

True
when searching for fraud symptoms

10. The gross profit (margin) ratio is calculated by dividing False

gross profit by cost of goods sold.

11. Working capital turnover ratio is calculated by dividing False

average working capital by sales.

12. Accounts receivable turnover is one of the most widely

True
used ratios to analyze revenues and is a measure of the
efficiency with which receivables are being collected.

13. One of the most practical ways to look for analytical

True
symptoms of fraud are to focus on changes and
comparisons within and from the financial statements

MULTIPLE CHOICES
1. The most common account(s) manipulated when perpetrating financial statement fraud
are:
A. Expenses
B. Inventory
C. Revenues
D. Accounts Payable
2. Why might a company want to understate net income?
A. To increase profits
B. To increase stock price
C. To gain consumer confidence
D. To pay less taxes

3. Reported revenue and sales account balances that appear too high are examples of:
A. Analytical symptoms
B. Documentary symptoms
C. Lifestyle symptoms
D. Verbal symptoms

4. Horizontal analysis is a method that:

A. Examines financial statement numbers from period to period.
B. Examines percent changes in account balances from period to period
C. Examines transactions from period to period
D. None of the above

5. Recording fictitious receivables will usually result in a(n):

A. Sales return percentage that remains constant
B. Increased sales discount percentage
C. Increase in accounts receivable turnover
D. Increase in the number of days in receivables

6. Comparing recorded amounts in the financial statements with the real-world assets they
are supposed to represent would be most effective in detecting:
A. Cash and inventory fraud
B. Accounts payable fraud
C. Revenue-related fraud
D. Accounts receivable fraud

7. Lifestyle symptoms are most effective with:

A. Revenue-related financial statement frauds
B. Inventory-related financial statement frauds
C. Employee frauds
D. Accounts payable financial statement frauds

8. Which of the following is not an inventory-related documentary symptom?

A. Duplicate purchase orders
B. Missing inventory during inventory counts
C. Unsupported inventory sales transactions
D. All of the above are inventory-related documentary symptoms
9. When looking for inventory fraud, an important question to ask is:
A. What is the nature of inventory?
B. What is the age of inventory?
C. What is the salability of inventory?
D. All are important questions to ask

10. Which of the following ratios would not generally be used to look for inventory- and cost
of goods sold-related frauds?
A. Accounts payable turnover
B. Gross profit margin
C. Inventory turnover
D. Number of days' sales in inventory

11. In order to analyze financial statements for fraud, an auditor or fraud examiner should
consider all of the following except:
A. The types of accounts that should be included in the financial statements
B. The types of fraud to which the company is susceptible
C. The nature of the company's business and industry
D. The auditor should consider all of the above

12. Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly
recorded revenues are examples of:
A. Analytical symptoms
B. Documentary symptoms
C. Control symptoms
D. Perceptional symptoms

13. Accounts that can be manipulated in revenue fraud include all of the following except:
A. Accounts receivable
B. Bad Debt Expense
C. Inventory
D. Sales Discounts

14. Which financial ratio is not useful in detecting revenue-related fraud?

A. Gross profit margin ratio
B. Account receivable turnover ratio
C. Asset turnover ratio
D. All of the above are useful revenue-related fraud detection ratios

15. The asset turnover ratio measures:

A. The average time an asset is used by the company
B. The average useful life of capital assets
 C. Sales that are generated with each dollar of the assets
D. Assets that are purchased with each dollar of sales

16. The most common way to overstate revenues is to:

A. Record revenues prematurely
B. Abuse the cutoff line for recording revenues
C. Create fictitious revenues
D. None of the above

17. Which of the following is a possible scheme for manipulating revenue when returned
goods are accepted from customers?
A. Understate allowance for doubtful accounts (thus overstating receivables)
B. Record bank transfers when cash is received from customers
C. Write off uncollectible receivables in a later period
D. Avoid recording of returned goods from customers

18. All of the following ratios are useful in detecting large revenue frauds except:
A. Gross profit margin
B. Current Ratio
C. Working Capital Turnover
D. Accounts Receivable Turnover

19. Each of the following illicit revenue transactions is correctly linked with the financial
statement accounts involved except:
A. Recognzing revenues too early - Accounts receivable. Revenue
B. Understate allowance for doubtful accounts - Bad Debt Expense. Allowance for
Doubtful accounts.
C. Don't write off uncollectible receivables - sales returns. sales discounts.
D. Don't record discounts given to customers - cash. sales discounts. accounts receivables
E. Record returned goods after the end of the period - sales returns. accounts receivables.

20. Identify which ratio is correctly linked to the information it could reveal about the
company's potential for revenue fraud.
A. Gross profit margin - this ratio will increase if management overstates inventory
B. Sales return percentage - a sudden decrease in this ratio can mean that customer
discounts are not being recorded in the accounting records.
C. Allowance for uncollectible accounts as a percent of receivables - when a company
records fictitious receivables, this ratio increases
D. Operating profit margin - a dramatic decrease in this ratio could indicate fraud.

21. Which of the following is a common way to perform financial-statement analysis while
searching for revenue-related analytical symptoms?
A. Look for unusual changed in revenue-related account balances from period to period
(trends)
 B. Look for unusual changes in revenue-related relationships from period to period
C. Look for unusual changes in the cost of goods sold account from period to period
D. Both a and b are common ways to perform within-statement analysis while
searching for revenue-related analytical symptoms
E. All of the above are common ways to perform financial statement analytical symptoms

22. Primarily occurring at the end of the year in an attempt to inflate sales, the practice of
shipping more items to distributors than they can sell in a reasonable time period is
known as:
A. Lapping
B. Channel stuffing
C. Bill-and-hold transactions
D. Consignment sales

SHORT CASES

Horizontal analysis for Techno-World is as follows:

Analysis performed to find differences between 2007 and 2010

1. Cash:

: 1500-1000
1000

= 50%

2. Accounts Receivable:

: 900-250
250

= 260%

3. Inventory:

: 975-600
600

= 63%

4. Notes Receivable:

: 500-500
500

= 0%
5. Total Assets:

: 5825-3850
3850

= 51%

6. Accounts Payable:

: 1100-700
700

= 57%

7. Other Current Liabilities:

: 425-200
200

= 113%

8. Notes Payable:

: 1750-1200
1200

= 46%

9. Total Liabilities:

3275-2100
2100

= 56%

10. Stock Outstanding:

1000-1000
1000

= 0%

11. Retained Earnings:

1550-750
750

= 107%