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1 : What Every Accountant Should Know About Fraud GLOBAL Headquarters the gregor building 716 West Ave Austin, TX USA

2 TABLE OF CONTENTS I. INTRODUCTION Video Supplement... 1 Course Objectives and Overview... 1 II. OVERVIEW Who Commits Financial Statement Fraud?... 3 Who Are the Victims of Fraudulent Financial Reporting?... 3 What Is Fraud?... 3 What Is Financial Statement Fraud?... 3 What Is a Financial Statement?... 4 The Cost of Financial Statement Fraud... 5 Why Is Financial Statement Fraud Committed?... 6 Video... 6 Video... 7 The COSO Study on Financial Statement Fraud... 8 What Are Typical Financial Statement Frauds?... 9 Summary Review Questions III. LEGAL ELEMENTS OF FINANCIAL STATEMENT FRAUD Intent Materially Misleading Financial Statements What Is Materiality? Prosecution Criminal Enforcement Civil Enforcement What Is the Genesis of Accountants and Auditors Liability? Breach of Contract Professional Negligence Gross Negligence Fraud Constructive Fraud Summary Review Questions IV. MANAGEMENT'S, AUDITORS', AND FRAUD EXAMINERS' RESPONSIBILITIES Management Video The Treadway Commission Mandatory Independent Audit Committee Written Charter Resources and Authority Informed, Vigilant, and Effective Audit Committees The COSO Report COSO Guidance for Smaller Public Companies Document Retention Policies i

3 IV. MANAGEMENT'S, AUDITORS', AND FRAUD EXAMINERS' RESPONSIBILITIES (CONT.) Fraud Prevention Programs Certified Fraud Examiners Help Resolve Allegations of Fraud Obtain Evidence Take Statements Write Reports Testify to Findings Assist in the Detection and Prevention of Fraud Video External Auditors AU Section PCAOB Auditing Standard No Statement of Standards for Attestation Engagements No AU Section PCAOB Auditing Standard No AU Section Video Internal Auditor Responsibilities Standard 1210 Proficiency Standard 1220 Due Professional Care Standard 2060 Reporting to Senior Management and the Board Standard 2110 Governance Standard 2120 Risk Management Standard 2130 Control Standard 2210 Engagement Objectives The IIA s IPPF Practice Guide: Internal Auditing and Fraud Video GAO Auditing Standards Purpose and Applicability Ethical Principles in Government Auditing Types of Government Audit Engagements Audit Standards The Sarbanes-Oxley Act Public Company Accounting Oversight Board Officers and Directors Audit Committee Video External Auditors Whistleblower Protection Civil and Criminal Penalties for Noncompliance Private Securities Litigation Reform Act Summary Review Questions ii

4 V. SCHEMES Fictitious Revenues Fabricating Revenue Video Detecting Fictitious Revenues Video Improper Recording of Sales Returns, Allowances, and Discounts Sales with Conditions What Red Flags Are Associated with Fictitious Revenues? Practical Problem Timing Differences Revenue Recognition Defined Premature Revenue Recognition Long-Term Contracts Multiple Deliverables Channel Stuffing Recording Expenses in the Wrong Period Red Flags Associated with Timing Differences Video Practical Problem Practical Problem Improper Asset Valuation Inventory Valuation Accounts Receivable Video Video Business Combinations Fixed Assets Red Flags Associated with Improper Asset Valuation Video Practical Problem Concealed Liabilities and Expenses Liability and Expense Omissions Video Capitalized Expenses Returns and Allowances and Warranties Red Flags Associated with Concealed Liabilities and Expenses Improper Disclosures Liability Omissions Subsequent Events Management Fraud Related-Party Transactions Accounting Changes Backdating Stock Options Red Flags Associated with Improper Disclosures Video Practical Problem Review Questions iii

5 VI. APPENDIX A Ratios Sales Current Year Current Assets - Current Liabilities Net Income Bad Debts Cash Flow from Operations Vertical Analysis Horizontal Analysis VII. APPENDIX B WorldCom, Inc Adelphia VIII. APPENDIX C Video Transcripts VIII. SOLUTIONS TO REVIEW QUESTIONS IX. SOLUTIONS TO PRACTICAL PROBLEMS X. FINAL EXAMINATION... E-1 XI. INDEX... I-1 iv