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Identify & explain 5 fraudulent financial reporting schemes

Your audit manager has assigned you to train your peers on an audit team about fraudulent financial reporting schemes.

Identify and explain 5 fraudulent financial reporting schemes to your peers.

Use 2 examples involving accounting transactions to demonstrate each of the schemes that you identified.

Show how auditors can utilize analytical procedures, test of details, and confirmations to uncover the schemes that you identified.

Solution Preview

1. Channel stuffing. This is the scheme where firms ship to a warehouse, a customer or load onto a carrier, even though there is no real demand from customers/end users.
? Examples:

Client loads trucks with product and claims that the shipping terms are FOB Shipping Point and so revenue should be recognized on the goods on the trucks.

Client ships to customers or warehouses without valid purchase order.

? Procedures to identify scheme:

You would verify shipping terms for the inventory loaded on trucks and verify that there were valid purchase orders for those items.

You would select certain shipments, particularly in the cutoff period near year end, and determine if there was a valid purchase order to support the shipment.

You can see if the goods are paid for promptly after year end. Channel stuffing is almost always accompanied by extended payment terms to permit the customer extra time to absorb the extra ...

Solution Summary

Your tutorial is 532 words and includes the description of five frauds, examples of how the fraud might be carried out and ideas about how to audit to discover the fraud.