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    Which Ratios Would Be Impacted by These Fraud Schemes?

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    Question (2) — Financial Ratios and Fraud

    The following are independent fraud schemes. For each scheme indicate which of the below financial ratios could alert the auditor by an unusual increase (INC) or decrease (DEC) and provide and explanation for your answer. Each scheme might affect some or all of the ratios.
    Case 1: The Company incorrectly altered the aging schedule of accounts receivable to reflect more current accounts receivable.
    Case 2: The Company fraudulently starts capitalizing costs (as long term assets) which have been historically expensed immediately.
    Case 3: The Company misclassifies interest payments as payments of the principal of a long-term bank loan.
    C ace 4: The Company moves inventory from one warehouse to the other during an inventory count by the auditor.

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    Solution Preview

    Case 1: None of these ratios would signal that the client changed the aging buckets since this does not change total AR. If the client left off some old AR balances in order to make the aging look better, the AR turnover would look higher because ...

    Solution Summary

    In the solution a few sentences explains each fraud scheme.