Forensic and Investigative Accounting Test 2 ch3-5
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Course
Forensic and Investigative Accounting
Institution
Forensic And Investigative Accounting
Six legged stool - answer-well-functioning system of corporate governance composed of six groups: the board of directors, the audit committee, the top management team, internal auditors, external auditors, and certain governing bodies (e.g., SEC, AICPA, NYSE, and NASD)
statement of financial con...
Forensic and Investigative Accounting Test 2 ch3-5
Six legged stool - answer-well-functioning system of corporate governance composed of six groups: the board of
directors, the audit committee, the top management team, internal auditors, external auditors, and certain governing
bodies (e.g., SEC, AICPA, NYSE, and NASD)
statement of financial concepts no 2 - answer-provides nine qualities and characteristics that make financial information
useful for investors, creditors, analysts, and other users of financial information
bill and hold strategy - answer-The company sold products to customers but held on to the shipments with an
agreement to deliver the goods later.
channel stuffing - answer-A company may engage in channel stuffing by offering large discounts or other inducements to
a distributor/retailer to receive large orders late in the reporting quarter to increase their revenue. If the distributor has
a side agreement that gives them the right to return any unsold inventory, these sales do not meet the revenue
recognition in SAB No. 104
Howard M. Schilit's financial shenanigans - answer-Recording revenue before it is earned (sales on consignment, e.g.,
Cendant and Sunbeam). In 1997, Sunbeam offered deep discounts on gas grills in the fourth quarter under a classic "bill
and hold" strategy. They booked the income and held the grills in their warehouses. For 1997, Sunbeam restated
earnings by about $93 million. In another example, Qwest had 19 transactions where they booked income before
receiving payments. The SEC calls this practice "channel stuffing."
Creating fictitious revenue (false journal entries; almost 40 percent of earnings misstatements from 1995 to 1999 had to
do with revenue recognition, and one-half of these involved complete fabrication, as with Kroger).
Boosting profits with nonrecurring transactions (selling stock for a gain).
Shifting current expenses to a later period (debit an asset account rather than expensing, e.g., Waste Management). In
1999, AMR changed the depreciation schedule from 20 to 25 years on some planes which reduced depreciation expense
in 2000 by $158 million. WorldCom shifted at least $3.8 billion of line-cost expenses to its capital accounts over at least
five quarters starting in 2001. So rather than $1.4 billion of reported profits in 2001, the company had a loss.
Failing to record or disclose liabilities (Adelphia omitted at least $1.8 billion of debt from its balance sheet).
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, Shifting current income to a later period (recognizing current revenues as deferred revenues).
Shifting future expenses to an earlier period (expensing items that should be debited to an asset account, e.g., software
costs).
KPMG categories of fraud - answer-Employee, Management, External
professor razaee - answer-Wrote the book on financial statement fraud
developed the six legged stool theory
COSO defines internal control - answer-a process, effected by an entity's board of directors, management and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following
categories:
Effectiveness and efficiency of operations,
Reliability of financial reporting, and
Compliance with applicable laws and regulations."
fraud identifier to spot fraudsters - answer-large ego, substance abuse problems or gambling addiction, living beyond
apparent means, self-absorption, hardworking/taking few vacations, under financial pressure (e.g., heavy borrowings),
and sudden mood changes
employee fraud - answer-stock theft
misappropriation of assets
Lapping
check forgery
expense account
petty cash
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