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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 Senior Management s Opinions on Financial Statement Fraud... 5 Why Is Financial Statement Fraud Committed?... 6 Video... 7 Video... 8 Summary... 9 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 Origin 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 Responsibilities Video The Treadway Commission Mandatory Independent Audit Committee Written Charter Resources and Authority Informed, Vigilant, and Effective Audit Committees The COSO Framework Control Environment Risk Assessment i

3 IV. MANAGEMENT S, AUDITORS, AND FRAUD EXAMINERS RESPONSIBILITIES (CONT.) Control Activities Information and Communication Monitoring COSO Guidance for Smaller Public Companies The COSO Study on Financial Statement Fraud 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 External Auditor Responsibilities AU Section PCAOB Auditing Standard No Statement of Standards for Attestation Engagements No AU Section PCAOB Auditing Standard No AU Section Video Government Auditing Standards Purpose and Applicability Ethical Principles in Government Auditing Types of Government Audit Engagements Audit Standards 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 Summary Review Questions V. THE SARBANES-OXLEY ACT Introduction Public Company Accounting Oversight Board Officers and Directors Audit Committee Video External Auditors ii

4 V. THE SARBANES-OXLEY ACT (CONT.) Whistleblower Protection Civil and Criminal Penalties for Noncompliance Summary Review Questions VI. FINANCIAL STATEMENT FRAUD SCHEMES What Are Typical Financial Statement Frauds? 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? 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 Improper Asset Valuation Inventory Valuation Accounts Receivable Video Video Business Combinations Fixed Assets Red Flags Associated with Improper Asset Valuation Video 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 iii

5 VI. FINANCIAL STATEMENT FRAUD SCHEMES (CONT.) Video International Financial Reporting Standards New Revenue Recognition Standards Review Questions VII. PRACTICAL PROBLEMS Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem VIII. APPENDIX A: RATIOS IX. APPENDIX B: CASE EXAMPLES X. APPENDIX C: VIDEO TRANSCRIPTS XI. SOLUTIONS TO REVIEW QUESTIONS II. Overview Review Questions III. Legal Elements of Financial Statement Fraud Review Questions IV. Management s and Auditors Responsibilities Review Questions V. The Sarbanes-Oxley Act Review Questions VI. Financial Statement Fraud Schemes Review Questions XII. SOLUTIONS TO PRACTICAL PROBLEMS Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem XIII. FINAL EXAMINATION... E-1 XIV. INDEX... I-1 iv