FRAUD EXAMINATION
ALBRECHT, ALBRECHT, & ALBRECHT
Liability, Asset &
Inadequate Disclosure
Frauds
Chapter 13
Learning Objectives
1. Identify fraudulent schemes that
understate liabilities.
2. Understand the understatement of
liabilities fraud.
3. Identify fraudulent schemes that
overstate assets.
4. Understand the overstatement of
assets fraud.
Learning Objectives
5. Identify
fraudulent
schemes that
inadequately
disclose
financial
statement
information.
6. Understand the
inadequate
disclosure fraud.
What Makes It Hard for
Auditors to Detect Fraud?
Collusion Silence
Forgery Off-Book Frauds
Complex Audit Misleading
Trails Documents
Lies
Small Frauds
Normal Looking
Transactions First Time
Fraudsters
How is Liability and
Revenue Fraud Committed?
Liabilities O
U V
N E
D R
E S
R T
S A
T T
A E
T D
E
D Revenues
How is Liability Fraud
Committed?
1. Dont Record Purchase
or Record in the Next
Accounting Period
2. Overstate Purchase
Returns & Allowances
3. Make It Appear that
Liabilities Are Paid or
Forgiven
Discuss Ways Liability Fraud is
Committed.
Fraudulent recording of payments
Dont record accrued liabilities
Dont record warranty liabilities or
service
Record deposits as revenues
Borrow against equities in assets
Write off liabilities as forgiven
Dont record contingent liabilities that
are probable
What are Accrued
Liabilities?
Liabilities incurred,
Used goods or services,
but not recorded because
paperwork not received,
Often estimated
How Are Unearned
Revenues Abused?
Instead of recording as a liability the
revenue is recognized & recorded
EXPLAIN
By not recording as a debt, debts
(liabilities) are understated & revenues
overstated - results in not disclosing
debt
By claiming debt forgiven or paid
By claiming debt as personal, not
business, debt
Define a Contingent
Liability.
Liabilities are not incurred but have some
probability of being incurred
RECORD if probable & estimable
DISCLOSE in footnote if reasonably
possible
DO NOTHING if remotely probable
How are they abused?
Underestimate amount or probability
What Are Some Analytical
Symptoms of Liability Fraud?
Balances appear to be too small
Purchase Returns & Allowances seem
too large
Unearned Revenues, payroll taxes,
payroll deductions, accrued liabilities,
warranty balances appear to be too
small
What Symptoms Appear in
Documents?
Large purchases Unsupported or
recorded at the unauthorized
beginning of the balances
period
Photocopied records Last minute
instead of originals adjustments
Strange differences Missing records
between balances &
confirmations Denied access to
Not recorded timely records, facilities,
vendors or people
What Are Some Other Clues
to Liabilities Fraud?
Unrecorded Liens
No payments to Govt.
No Payroll Withholdings
Capitalization of Wages
Interest with NO Recorded Debt
Complete The Chart.
Analysis of Analysis of
Period-to-Period Changes Period-to-Period Changes
Liability Account Balances With Industry Competitors
1. Focus on changes in 1. Compare statement
statement numbers results with those of
2. Study Statement of Cash similar companies
Flow 2. Compare companys
3. Use horizontal analysis trends with those of
similar companies
Liability Relationships With Real-World Numbers
1. Examine changes in 1. Compare statement
relevant ratios amounts with the assets
2. Use vertical analysis they are supposed to
represent
What is a Recommended Process
for Examining for Liabilities
Fraud?
Ask what kind of fraud could be occurring.
Identify what symptoms those frauds
would generate.
Determine whether those symptoms exist.
Follow up to determine if the symptom
signals fraud, or an abnormality caused by
something else.
List Ratios that Are Used to
Detect These Types of Fraud.
Under recording Under recording
Accounts Payable Accrued Liabilities
(A/P) Various Accruals to
Acid-test Number of days to
Current accrue compared to
same ratio in prior
A/P to Purchases years
A/P to COGS Various Accruals to
A/P to Total Related Expenses
Liabilities
Under recording
A/P to Inventory
Unearned Revenues
Unearned Revenue
to Revenue
List Ratios that Are Used to
Detect These Types of Fraud.
Under recording Total Liabilities to
Service Liabilities Total Assets
Warranty Expense to Pension Expenses to
Sales Salary Expense
Under recording Lease Expense to
Various Liabilities Total Fixed Assets
Interest Expense to Not Recording
Notes Payable Contingent Liabilities
Long-Term Debt to Generally no ratios to
Stockholders Equity help you, you must
Various Types of look for documentary
Debt to Assets evidence.
Define Improper Capitalization
or Expensing.
Recording something as an asset
when it should be expensed.
This changes the time period when
the expense is charged against
income.
List Five Common Ways to
Overstate Assets.
Overstate
Overstate Fixed
Receivables and
Assets
Inventory
Overstate Cash,
Short-term
Investments and
Marketable
Overstate Securities
Overstate
Assets though
Intangible or
Mergers and
Deferred Assets
Acquisitions
List Some Ways Fixed
Assets Are Overstated.
Record at
Under
Fair Market
Depreciate
Value
Record Fully Record
Depreciated Non-Existing
Assets Assets
What Does Publicly Traded
Mean?
List Some Symptoms of
Asset Fraud.
Deferred Interest
Size of Deferred Charges
Year-End Reclassification or JEs that
reduce expenses & increase deferred
charges
Discuss & Define Inadequate
Disclosure Fraud.
How Are Footnotes Made
Misleading?
Missing
Confusing
Contingent Liabilities
Contractual
Obligations
Significant Events
Terms Match
Mortgage Purchase something, one
company by another
Long-term loan secured
Acquisition
by real property
Rent asset, do not own,
Merger make periodic payments
Stocks, bonds and other
Lease non-cash assets
Combining two
Marketable businesses into one
Securities business
Terms Match
Deferred Asset Asset that is not
tangible, cant touch
Fixed Asset Retirement benefits paid
to former employees
Intangible Capitalized expenditure
Asset to be expensed in future
Property, Plant &
Pension Equipment
Recording expenditure
Capitalization as an asset
Terms Match
Liability Assets are recorded at
Frauds higher values than they
should be
Disclosure Agreement to buy back
Frauds something already sold
Asset Issuing financial
Frauds statements with
inadequate disclosure
Repurchase Liabilities are
Agreement understated
