Fraud Examination

Chapter 13
Liability, Asset, and Inadequate
Disclosure Frauds

Albrecht, Albrecht, Albrecht, Zimbelman

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To the Student
 This chapter concludes our discussion on financial statement fraud by
covering several other types of financial statement frauds, including
understating liabilities, overstating assets, and inadequate disclosures.
In dealing with these frauds, we look at how to identify fraud
exposures and to actively search for and detect fraud symptoms.

 While not as common as revenue or inventory-related frauds, they can

be just as significant, as is illustrated in the Waste Management, Inc.,
fraud.

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 fraudulent schemes that understate
liabilities.
Discuss the understatement of liabilities fraud.
Describe fraudulent schemes that overstate
assets.
Understand the overstatement of assets fraud.
List fraudulent schemes that inadequately
disclose financial statement information.
Explain the inadequate disclosure fraud.
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
Types of Financial Statement
Fraud
1. Understating liabilities
2. Overstating assets
3. Inadequate disclosure

Why might liabilities be understated if proper

adjusting entries are not made at the end of an
accounting period?

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
Understatement of
Liabilities Fraud
Schemes that understate liabilities
Understating accounts payable
Understating Accrued Liabilities
Recognizing Unearned Revenue as Earned
Revenue
Underrecording Future Obligations
Not Recording or Underrecording Various Types
or Debt (Notes, Mortgages, etc.)
Omission of Contingent Liabilities
Albrecht, Albrecht, Albrecht, Zimbelman

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Understatement of
Liabilities Fraud
Ways to detect understatement of liabilities
Abnormal analytical symptoms
 Reported accounts payable balances that appear too low
 Purchase or cost of goods sold numbers that appear too
low or purchase returns or discounts that appear too high

Documentary symptoms
 Involve such things vendor invoices that have been
received but no liability is recorded
 Can relate to specific accounts, for example payroll might
include employee with no withholdings
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
Overstatement of Assets
Fraud

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
Overstatement of Assets
Fraud
 Ways to detect overstatement of assets
 Compare changes and trends in financial statement
account balances
 Compare changes and trends in financial statement
relationships
 Compare financial statement balances with nonfinancial
information or things, such as the assets they represent
 Compare financial statement balances and policies with
those used by other similar companies

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Inadequate Disclosure Fraud

Disclosure Fraud Schemes

Misrepresentation about the nature of the
company or its products
Misrepresentations or omissions in the MD&A
Misrepresentations or omissions in the footnotes
to the financial statements

Albrecht, Albrecht, Albrecht, Zimbelman

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Inadequate Disclosure Fraud

Ways to identify Disclosure Fraud

Look for inconsistencies between disclosures and
information in the financial statements
Inquire of management concerning related-party
transactions, contingent liabilities, and contractual
obligations
Review a company’s files and records with the
SEC and other regulatory agencies

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