Fin Week 9 Course Material For Corporate Governance

Subject Code: BAGOSBUSX
Subject Title: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT

AND INTERNAL CONTROL
Subject Description: This course is intended to build understanding of students on

fundamental concepts of corporate governance, risk management
process, and internal control system. At the end of course, students
are expected to be competent on these fundamental concepts in
applying to actual corporate setting and on how to evaluate and
improve financial and operational processes of organization’s risk
management, control, and governance.
No. of Units: 3
Class Schedule: Synchronous: MTh 09:00am – 11:00am; 11:00am – 01:00pm;

03:00pm-05:00pm
Course Learning Outcomes:

At the end of the course, the student must be able to:
1. Execute consolidation of simple financial statements.
2. Describe principles and characteristics of IFRS/IAS for consolidated financial statements.
3. Evaluate differences between IFRS/IAS and local GAAPs and apply intricate IFRS/IAS
requirements (e.g. IAS 12, IAS 21)
4. Apply acquired knowledge and skills to pass professional licensure / certifications and use
these skills for future job aspects.
5. Appraise ethical problems / issues in practical business and accounting situations and
recommended appropriate course action that adheres to the professional code of ethics.
About the Instructor:

She is a graduate of Bachelor of Science in Accountancy at Baliuag University batch 2014 with
honors (Cum Laude).
After passing the CPA Board Exam, she joined the accounting firm Punongbayan & Araullo, the
Philippine member firm of Grant Thornton International Ltd (GTIL), one of the world's leading
organizations of independently owned and managed accounting and consulting firms as an Audit
Associate.
She completed her Masters in Business Administration at Baliuag University in 2017. Until
recently, she is the Internal Auditor for Bela Star Distribution Systems Inc., one of the leading
commodities trading companies in North Central Luzon.
-Ms. Fideliz Arca Vidal, CPA, MBA
SM Baliwag Complex, Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
(+63) 927-533-0342 – (+63) 923-949-5265 admissions-nubaliwag@nu.edu.ph
Contact Information:
Facebook Account: FIDELIZ ARCA VIDAL
Email Address: fcvidal@nu-baliwag.edu.ph
Contact Number: 0917-125-7539 (globe)
Topics:
Module 8: Fraud
1. Classification of Fraud
2. Types of Management Fraud
3. Types of Employee Fraud
4. Fraud Triangle
5. Special Consideration for Fraud
DISLAIMER: The information content provided in this course material is designed to provide
helpful information on the subjects discussed. Some information’s are compiled from different
materials and summarized from different books. Some information’s are based on contributors'
perspective and understanding. References are provided for informational purposes only and do
not constitute endorsement of websites or other sources. Readers should be aware that the
websites/electronic references listed in this course material may change. Hence, the contributors do
not claim any information presented in the materials and do not reflect their own work.
MODULE 7:
FRAUD
I. Activity:
II. Learning Outcomes

At the end of the topic the students should be able to:
1. Understand the different Classification of Fraud
2. Understand the different Types of Management and Employee Fraud
3. Enumerate the Fraud Triangle
III. Content:
FRAUD is the intentional act involving the use of deception that results in a material misstatement
of the financial statements
THE FRAUD TRIANGLE hypothesizes that if all three components are present — unshareable
financial need, perceived opportunity and rationalization — a person is highly likely to pursue
fraudulent activities.
Categories of Fraud
o Against individuals - This is when a single person is targeted by a fraudster — including

identity theft, phishing scams and “advance-fee” schemes. Perhaps one of the most
noteworthy and devastating individual frauds is the Ponzi scheme.
o Internal organizational fraud - Sometimes called “occupational fraud,” this is when an

employee, manager or executive of an organization deceives the organization itself. Think
embezzlement, cheating on taxes, and lying to investors and shareholders.
o External organizational fraud - This includes fraud committed against an organization
from the outside, such as vendors who lie about the work they did, demand bribes from
employees and rig costs. But customers sometimes defraud organizations, such as when they
submit bad checks or try to return knock-off or stolen products. And increasingly,
technology threatens organizations with theft of intellectual property or customer
information.
FRAUD CLASSIFICATION
Figure 1 Fraud Tree
Occupational Fraud and Abuse Classification System
THE THREE MAJOR TYPES OF OCCUPATIONAL FRAUD
 Corruption
 Asset misappropriation
 Financial statement fraud
A. FINANCIAL STATEMENT FRAUD is the deliberate misrepresentation of the financial

condition of an enterprise accomplished through the intentional misstatement or omission of
amounts or disclosures in the financial statements to deceive financial statement users.
Typically committed by individuals employed in managerial or senior executive positions

who not only have the ability to alter the financial statements but also an incentive to do so.
Chief executive officers (CEOs) are often perpetrators of financial statement fraud because
they have ultimate responsibility for the success of an organization.
Cost of Financial Statement Fraud

 The stock market capitalization of companies affected by financial statement fraud
might fall substantially almost overnight, losing billions of dollars for investors.
Even if the balance sheet and income statement do not change substantially, a
restatement is likely to damage investors’ confidence in the reporting ability of the
company’s management and its auditors, and the company’s stock price will
decrease accordingly.
 Many jobs might be lost as companies restructure to restore profitability. Financial
statement fraud can influence the well-being of employees, who might lose their
jobs, retirement funds, any savings invested in their employer’s stock, and health
care and other benefits. The company’s auditors are likely to be sued for the amount
of investors’ losses, which could mean billions of dollars for large public companies.
For large and small companies alike, financial statement fraud can be costly and
potentially destroy the company.
Why Financial Statement Fraud is Committed
 To encourage investment through the sale of stock

 To demonstrate increased earnings per share or partnership profits interest, thus
allowing increased dividend/distribution payouts
 To cover inability to generate cash flow
 To avoid negative market perceptions
 To obtain financing, or to obtain more favorable terms on existing financing
 To receive higher purchase prices for acquisitions
 To demonstrate compliance with financing covenants
 To meet company goals and objectives
 To receive performance-related bonuses
Some of the more obvious opportunities for the existence of fraud are:
 Absence of a board of directors or audit committee
 Improper or lack of oversight or other neglectful behavior by the board of directors
or audit committee
 Weak or nonexistent internal controls, including an ineffective internal audit staff
and a lack of external audits
 Unusual or complex transactions (an understanding of the transactions, their
component parts, and their effect on financial statements is paramount to fraud
deterrence)
 Financial estimates that require significant subjective judgment by management
THE FIVE CLASSIFICATIONS OF FINANCIAL STATEMENT SCHEMES ARE:
 Fictitious revenues
Fictitious or fabricated revenues involve the recording of sales of goods or

services that did not occur. Fictitious sales most often involve fake customers but
can also involve legitimate customers.
What Red Flags Are Associated with Fictitious Revenues?

 An unusually large amount of long overdue accounts receivable
 Outstanding accounts receivable from customers that are difficult or
impossible to identify and contact
 Rapid growth or unusual profitability, especially compared to that of
other companies in the same industry
 Recurring negative cash flows from operations or an inability to
generate positive cash flows from operations while reporting earnings
and earnings growth
 Significant transactions with related parties or special purpose entities
not in the ordinary course of business or where those entities are not
audited or are audited by a separate firm
 Significant, unusual, or highly complex transactions, especially those
close to the period’s end that pose difficult “substance over form”
questions
 Unusual growth in the days’ sales in receivables ratio
(receivables/average daily sales)
 A significant volume of sales to entities whose substance and
ownership is not known
 An unusual increase in sales by a minority of units within a company
or in sales recorded by corporate headquarters
 Timing differences (including improper revenue recognition)
The recording of revenues or expenses in improper periods. This can be done to

shift revenues or expenses between one period and the next, increasing or
decreasing earnings as desired. This practice is also referred to as income
smoothing.
a. Premature Revenue Recognition

b. Sales with Conditions
c. Long-Term Contracts
d. Multiple Deliverables
e. Channel Stuffing
f. Recording Expenses in the Wrong Period
What Red Flags Are Associated with Timing Differences (Including Improper
Revenue Recognition)?
• Rapid growth or unusual profitability, especially compared to that of other

companies in the same industry
• Recurring negative cash flows from operations or an inability to generate

positive cash flows from operations while reporting earnings and earnings
growth
• Significant, unusual, or highly complex transactions, especially those close to

the period’s end, that lead to difficult “substance over form” questions
 Improper asset valuations
Typically, a fraudster artificially increases asset accounts to strengthen the

company’s balance sheet and its financial ratios. In some cases, however, a
fraudster might want to record false revenues, and overstated assets are simply a
by-product of that scheme.
With the exception of certain securities, asset values are generally not increased
to reflect current market value. It is often necessary to use estimates in
accounting.
Improper asset valuations usually take the form of one of the following
classifications:
• Inventory valuation
• Accounts receivable
• Business combinations
• Fixed assets
 Concealed liabilities and expenses
Understating liabilities and expenses is one of the ways financial statements can
be manipulated to make a company appear more profitable than it actually is.
Because pre-tax income will increase by the full amount of the expense or
liability not recorded, this financial statement fraud method can significantly
affect reported earnings with relatively little effort by the fraudster. It is much
easier to commit this scheme than to falsify sales transactions. Missing
transactions can also be harder for auditors to detect than improperly recorded
ones since the missing transactions leave no audit trail.
There are three common methods for concealing liabilities and expenses:
• Liability/expense omissions
• Improperly capitalizing costs rather than expensing them
• Failure to disclose warranty costs and product-return liabilities
What Red Flags Are Associated with Concealed Liabilities and Expenses?
• Recurring negative cash flows from operations or an inability to generate
positive cash flows from operations while reporting earnings and earnings
growth
• Assets, liabilities, revenues, or expenses based on significant estimates
that involve subjective judgments or uncertainties that are difficult to
support
• Nonfinancial management’s excessive participation in or preoccupation
with the selection of accounting principles or the determination of
significant estimates
• Unusual increase in gross margin or margin in excess of industry peers
• Allowances/provisions for sales returns, warranty claims, etc., that are
shrinking in percentage terms or are otherwise out of line with industry
peers
• Unusual reduction in the number of days’ purchases in accounts payable
ratio
• Reducing accounts payable while competitors are stretching out payments
to vendors
 Improper Disclosures
Accounting principles require that financial statements include all the

information necessary to prevent a reasonably discerning user of the financial
statements from being misled. Clearly, this principle is subject to the professional
judgment of the accountants and management preparing the financial statements.
Events, transactions, and policy changes that are likely to have a material impact
on the entity’s financial position must be disclosed. The financial statement notes
should include narrative disclosures, supporting schedules, and any other
information required to avoid misleading potential investors, creditors, or any
other users of the financial statements.
Improper disclosures resulting in financial statement fraud usually involve the
following:
• Contingent liabilities
• Subsequent events
• Management fraud
• Related-party transactions
• Accounting changes
What Red Flags Are Associated with Improper Disclosures?
• Domination of management by a single person or small group (in a

nonowner-managed business) without compensating controls
• Ineffective board of directors or audit committee oversight over the

financial reporting process and internal control
• Ineffective communication, implementation, support, or enforcement of the

entity’s values or ethical standards by management or the communication of
inappropriate values or ethical standards
• Rapid growth or unusual profitability, especially compared to that of other

companies in the same industry
• Significant, unusual, or highly complex transactions, especially those close

to a period’s end that pose difficult “substance over form” questions
• Significant related-party transactions not in the ordinary course of business

or with related entities either not audited or audited by a different firm
• Significant bank accounts or subsidiary or branch operations in tax-haven

jurisdictions for which there appears to be no clear business justification
• Overly complex organizational structure involving unusual legal entities or

managerial lines of authority
• Known history of violations of securities laws or other laws and regulations,

or claims against the entity, its senior management, or board members
alleging fraud or violations of laws and regulations
• Recurring attempts by management to justify marginal or inappropriate

accounting on the basis of materiality
• Formal or informal restrictions on the auditor that inappropriately limit

access to people or information, or limit the auditor’s ability to communicate
effectively with those charged with governance
B. ASSET MISAPPROPRIATION FRAUD is by far the most common of all occupational
frauds. It occurs when a perpetrator steals or misuses an organization’s assets. Asset
misappropriations are the dominant fraud schemes perpetrated against small business and
the perpetrators are usually employees.
CASH
i. CASH RECEIPTS
a. Skimming - is the theft of cash that has not yet been recorded in the
accounting system. Employees who skim from their companies steal sales
or receivables before they are recorded in the company books. Skimming
schemes are known as off-book frauds, meaning cash is stolen before it is
recorded in the victim organization’s accounts. This aspect of skimming
schemes means they leave no direct audit trail. Because the stolen funds
are never recorded, the victim organization might not be aware that the
cash was ever received. Consequently, it can be difficult to detect that the
cash has been stolen. This is the primary advantage of a skimming
scheme to the fraudster.
a. Sales Skimming - The most basic skimming scheme occurs

when an employee sells goods or services to a customer
and collects the customer’s payment but makes no record
of the sale. The employee simply keeps the money
received from the customer instead of turning it over to
their employer.
b. Register Manipulation - Some employees might ring a “no

sale” or other noncash transaction to mask the theft of
sales. The false transaction is entered on the register so
that it appears that a sale is being made. The perpetrator
opens the register drawer and pretends to place the cash
they have just received in the drawer, but in reality they
put it in their pocket. To the casual observer, it looks as
though the sale is being properly recorded. Some
employees might also rig their registers so that a sale can
be entered on the register keys but will not appear on the
register logs. The employee can then safely skim the sale.
Anyone observing the employee will see the sale entered,
the register drawer open, etc., yet the register log will not
reflect the transaction.
c. Skimming During Nonbusiness Hours - Another way to

skim unrecorded sales is to conduct sales during
nonbusiness hours. Fraudsters can keep the proceeds of all
sales made during these times because the owners have no
idea that their stores are even open for business.
d. Skimming of Off-site Sales - Several industries rely on
remote salespersons to generate revenue. The fact that
these employees are largely unsupervised puts them in a
good position to skim revenues.
e. Poor Collection Procedures - Poor collection and

recording procedures can make it easy for an employee to
skim sales or receivables.
f. Understated Sales - Understated sales work differently

because the transaction in question is posted to the books
but for a lower amount than what the perpetrator actually
collected.
g. Theft of Checks Received through mail- Theft of incoming

checks usually occurs when a single employee is in charge
of opening the mail and recording the receipt of payments.
This employee simply steals one or more incoming checks
instead of posting them to customer accounts.
h. Lapping - he crediting of one account through the

abstraction of money from another account. It is the
fraudster’s version of “robbing Peter to pay Paul.”
b. Larceny - the theft of money that has already appeared on a victim

organization’s books. In the occupational fraud setting, cash larceny is the
intentional taking of an employer’s cash (the term cash includes both
currency and checks) without the consent and against the will of the
employer. However, recall that skimming also involves the intentional
taking of an employer’s cash. The difference between skimming and cash
larceny is that skimming is the theft of cash before it appears on the
books. Cash larceny involves the theft of money that has already
appeared on the victim company’s books. Accordingly, these schemes are
much harder to get away with—they leave an audit trail.
a. Theft of Cash from the Register - Large percentage of cash

larceny schemes occur at the cash register, and for good
reason— the register is usually where the cash is. The
register (or similar cash collection points like cash drawers
or cash boxes) is usually the most common point of access
to cash for employees, so it is understandable that this is
where larceny schemes frequently occur. Furthermore,
there is often a great deal of activity at the register—
numerous transactions that require employees to handle
cash. This can serve as a cover for cash theft. In a flurry of
activity, with money being passed back and forth between
customer and employee, an employee can often slip cash
out of the register and into their pocket undetected.
b. Other Larceny of Sales and Receivables - Not all receipts

arrive via the cash register. Employees can just as easily
steal money received at other points. One of the more
common methods is to take checks received through the
mail and post the payments to the accounting system but
steal the checks.
ii. CASH DISBURSENT - In fraudulent disbursement schemes, an employee
makes a distribution of company funds for a dishonest purpose.
Examples of fraudulent disbursements include forging company checks, the

submission of false invoices, altering timecards, and so forth. On their face, the
fraudulent disbursements do not appear any different from valid disbursements of
cash. In many cases, the fraudster tricks the victim company into remitting
payment. For instance, when an employee runs a fake invoice through the
accounts payable system, the victim organization cuts a check for the bad invoice
right along with all the legitimate payments it makes. The perpetrator has taken
money from their employer in such a way that it appears to be a normal
disbursement of cash. Someone might notice the fraud based on the amount,
recipient, or destination of the payment, but the method of payment is legitimate.
a. False Refunds - A refund is processed at the register when a customer

returns an item of merchandise that was purchased from the store. The
transaction that is entered on the register indicates that the merchandise is
being replaced in the store’s inventory and the purchase price is being
returned to the customer. In other words, a refund shows cash being
disbursed from the register to the customer.
b. Fictitious Voids - Fictitious voids are similar to refund schemes in that

they make fraudulent disbursements from the register appear to be
legitimate. When a sale is voided on a register, a copy of the customer’s
receipt is usually attached to a void slip, along with the signature or
initials of a manager indicating that the transaction has been approved
INVENTORY&OTHER NONCASH ASSETS
A. MISUSED - The costs of inventory misuse are difficult to quantify. To many

individuals, this type of fraud is not viewed as a crime but rather as borrowing. In truth,
the cost to a company from this kind of scheme is often immaterial. When a perpetrator
borrows a stapler for the night or takes home some tools to perform a household repair,
the cost to their company is negligible, as long as the assets are returned unharmed. But
misuse schemes can also be very costly.
B. THEFT - Though the misuse of company property might be a problem, the theft of
company property is obviously of greater concern. Losses resulting from larceny of
company assets can run into the millions of dollars. Most schemes where inventory and
other noncash assets are stolen fall into one of four categories: larceny schemes, asset
requisition and transfer schemes, purchasing and receiving schemes, and false shipment
schemes.
a. Larceny Schemes - the term larceny is meant to refer to the most basic type of
inventory theft: the schemes in which an employee simply takes inventory from
the company premises without attempting to conceal the theft in the books and
records. In other fraud schemes, employees might create false documentation to
justify the shipment of merchandise or tamper with inventory records to conceal
missing assets. Larceny schemes are more blunt. The culprit in these crimes takes
company assets without trying to justify their absence.
b. Asset Requisitions and Transfers - Asset requisitions and other documents that
allow noncash assets to be moved from one location in a company to another can
be used to facilitate the theft of those assets. Employees use internal transfer
paperwork to gain access to merchandise that they otherwise might not be able to
handle without raising suspicion. These documents do not account for missing
merchandise the way false sales do, but they allow a person to move the assets
from one location to another. In the process of this movement, the thief steals the
merchandise.
c. Purchasing and Receiving Schemes - Dishonest employees can also manipulate

the purchasing and receiving functions of a company to facilitate the theft of
inventory and other assets. It might seem that any purchasing scheme should fall
under the heading of false billings, which were discussed earlier. There is,
however, a distinction between the purchasing schemes that are classified as false
billings and those that are classified as noncash misappropriations.
d. False Shipments of Inventory and Other Assets - To conceal thefts of inventory

and other assets, employees sometimes create false shipping documents and false
sales documents to make it appear that the inventory they take was sold rather
than stolen.
e. Concealing Inventory Shrinkage - When inventory is stolen, the perpetrator’s

key concealment issue is shrinkage. Inventory shrinkage is the unaccounted-for
reduction in the company’s inventory that results from error or theft. For
instance, assume a computer retailer has one thousand computers in stock.
C. BRIBERY & CORRUPTION - Corruption is a term used to describe various types of
wrongful acts designed to cause an unfair advantage. It can take on many forms, including
bribery, kickbacks, illegal gratuities, economic extortion, and collusion. Generally, it
involves the wrongful use of influence to procure a benefit for the actor or another person,
contrary to the duty or the rights of others. The various forms of corruption are often used in
combination, which reinforces the schemes’ potency and makes them more difficult to
combat.
Bribery may be defined as the offering, giving, receiving, or soliciting of corrupt payments
(i.e., items of value paid to procure a benefit contrary to the rights of others) to influence an
official act or business decision.
a. Kickback Schemes - a form of negotiated bribery in which a commission is paid

to the bribe-taker in exchange for the services rendered. Thus, kickbacks are
improper, undisclosed payments made to obtain favorable treatment. In the
government setting, kickbacks refer to the giving or receiving of anything of
value to obtain or reward favorable treatment in relation to a government
contract. In the commercial sense, kickbacks refer to the giving or receiving of
anything of value to influence a business decision without the employer’s
knowledge and consent.
b. Economic Extortion - An extortion case is often the other side of a bribery case.
Extortion is defined as the obtaining of property from another, with the other
party’s consent induced by wrongful use of actual or threatened force or fear.
Economic extortion is present when an employee or official, through the
wrongful use of actual or threatened force or fear, demands money or some other
consideration to make a particular business decision. That is, economic extortion
cases are the “Pay up or else ... ” corruption schemes.
To constitute extortion, the threat must be the controlling reason that the victim
gives up a right or property. The following types of threats can constitute
extortion:
• Physical harm
• Property damage
• Accusing a person of a crime
• Disgracing a person
• Public exposure
c. Collusion - Collusion refers to an agreement between two or more individuals to
commit an act designed to deceive or gain an unfair advantage. Typically,
collusion involves some sort of kickback, which can result in fraudulent billing
or inferior goods.
Red Flags of Corrupt Employees

• A high success rate in markets where competitors are known to bribe
• Reputation for regularly accepting inappropriate gifts
• Extravagant lifestyle
• Reputation for taking action without being instructed to do so or directing
subordinates to bend, break, or ignore standard operating procedures or rules to
benefit the payer
• Tendency of employees to insert themselves into areas in which they are
normally not involved
• Propensity to assert authority or make decisions in areas for which the
employees are not responsible
• Inclination to make excuses for deficiencies in a third party’s products or
services, such as poor quality, late deliveries, or high prices
• Circumstances that generate extreme personal pressures, such as ill family
members or drug addiction
• History of not filing conflict of interest forms
• Frequent hospitality and travel expenses for foreign public officials
• Friendly social relationship with a third-party contractor
Red Flags of Corrupt Third Parties
• Routinely offers inappropriate gifts, provides lavish business entertainment, or

otherwise tries to obtain favor with an organization
• Consistently receives contracts without any apparent competitive advantage
• Provides poor-quality products or services but is continually awarded contracts
• Charges unjustified high prices or price increases for common goods or
services
• Receives or pays fees in cash
• Receives or pays fees in a country different from where the underlying business
takes place
• Offers no apparent value to the organization
• Charges high commissions
• Claims to have special influence with a specific buyer
• Displays any of the following indicators suggesting lack of qualification:
− Inadequate financial resources
− Operating in a region with a history of corruption
− Decentralized operations
− Lack of qualifications or experience
− Poor performance record
− Reputation for dishonesty
− Past complaints or criminal or civil actions against the third party
− A history of fraudulent conduct
− Undisclosed interests in a company or business owned by an
employee
− Family ties with an employee
• Does not relate well to competitors
• Has an address or telephone number that matches an employee’s address, the
address of an employee’s outside business, or an employee’s relative’s address
• Provides an incomplete address (e.g., a PO Box, no telephone number, or no
street address)
• Provides multiple addresses
• Has a reputation for corruption or works in an industry or country with a
reputation for corruption
• Works as an independent sales representative, consultant, or other intermediary
who does not have the reporting and internal control requirements of their larger,
publicly held competitors
V. Evaluation
VI. References
Cabrera, M. E. (2021). Corporate Governance, Business Ethics, Risk Management and

Internal Control. Manila, Philippines: GIC Enterprises & co., Inc.

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Subject Code: BAGOSBUSX

Subject Title: GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT

Subject Description: This course is intended to build understanding of students on

Class Schedule: Synchronous: MTh 09:00am – 11:00am; 11:00am – 01:00pm;

Course Learning Outcomes:

About the Instructor:

-Ms. Fideliz Arca Vidal, CPA, MBA

II. Learning Outcomes

o Against individuals - This is when a single person is targeted by a fraudster — including

o Internal organizational fraud - Sometimes called “occupational fraud,” this is when an

Figure 1 Fraud Tree

Occupational Fraud and Abuse Classification System

THE THREE MAJOR TYPES OF OCCUPATIONAL FRAUD

A. FINANCIAL STATEMENT FRAUD is the deliberate misrepresentation of the financial

Typically committed by individuals employed in managerial or senior executive positions

Cost of Financial Statement Fraud

Why Financial Statement Fraud is Committed

 To encourage investment through the sale of stock

THE FIVE CLASSIFICATIONS OF FINANCIAL STATEMENT SCHEMES ARE:

Fictitious or fabricated revenues involve the recording of sales of goods or

What Red Flags Are Associated with Fictitious Revenues?

 Timing differences (including improper revenue recognition)

The recording of revenues or expenses in improper periods. This can be done to

a. Premature Revenue Recognition

• Rapid growth or unusual profitability, especially compared to that of other

• Recurring negative cash flows from operations or an inability to generate

• Significant, unusual, or highly complex transactions, especially those close to

 Improper asset valuations

Typically, a fraudster artificially increases asset accounts to strengthen the

 Concealed liabilities and expenses

Accounting principles require that financial statements include all the

What Red Flags Are Associated with Improper Disclosures?

• Domination of management by a single person or small group (in a

• Ineffective board of directors or audit committee oversight over the

• Ineffective communication, implementation, support, or enforcement of the

• Rapid growth or unusual profitability, especially compared to that of other

• Significant, unusual, or highly complex transactions, especially those close

• Significant related-party transactions not in the ordinary course of business

• Significant bank accounts or subsidiary or branch operations in tax-haven

• Overly complex organizational structure involving unusual legal entities or

• Known history of violations of securities laws or other laws and regulations,

• Recurring attempts by management to justify marginal or inappropriate

• Formal or informal restrictions on the auditor that inappropriately limit

a. Sales Skimming - The most basic skimming scheme occurs

b. Register Manipulation - Some employees might ring a “no

c. Skimming During Nonbusiness Hours - Another way to

e. Poor Collection Procedures - Poor collection and

f. Understated Sales - Understated sales work differently

g. Theft of Checks Received through mail- Theft of incoming

h. Lapping - he crediting of one account through the

b. Larceny - the theft of money that has already appeared on a victim

a. Theft of Cash from the Register - Large percentage of cash

b. Other Larceny of Sales and Receivables - Not all receipts

Examples of fraudulent disbursements include forging company checks, the

a. False Refunds - A refund is processed at the register when a customer

b. Fictitious Voids - Fictitious voids are similar to refund schemes in that

INVENTORY&OTHER NONCASH ASSETS

A. MISUSED - The costs of inventory misuse are difficult to quantify. To many

c. Purchasing and Receiving Schemes - Dishonest employees can also manipulate

d. False Shipments of Inventory and Other Assets - To conceal thefts of inventory

e. Concealing Inventory Shrinkage - When inventory is stolen, the perpetrator’s

a. Kickback Schemes - a form of negotiated bribery in which a commission is paid

Red Flags of Corrupt Employees