Financial Statement Fraud Schemes (Other (Not Listed) Sample)

Financial Statement Fraud Schemes
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Financial Statement Fraud Schemes
Financial statement fraud schemes in most cases involve the understatement of expenses and liabilities and overstatement of revenues and assets. This way, the fiscal statements would reflect an income statement and balance sheet that show the business being fiscally healthier than it actually is. With time, if continuously committed but not detected or rectified, this artificial net work will begin eroding the liquidity, solvency, and eventually the very existence of the firm (Louwers et al., 2011).
Potential financial statement fraud schemes
The possible financial statements fraud schemes are as follows: (1) improper or fictitious revenue recognition – a common scheme that fraudsters utilize in financial statement fraud entails manipulating revenue figures. This occurs when revenue that has not yet been earned is recorded (Moyo, 2012). It commonly involves fictitious invoices. Schemes for manipulating figures of revenue usually involve posting sales before they are made or before payment is made. Some of the examples are recording shipments to company-owned facilities as sales, pre-billing for future sales, re-invoicing past due accounts in order to improve the age of receivables, and duplicate billings (Louwers et al., 2011). (2) Overstating assets and improper asset valuations: overstatement of the company’s current assets on fiscal statements and failing to record depreciation expenditures can also be used at Apollo Shoes as methods of fraud. In addition, the managers can also overstate accounts receivables and inventory for the purpose of inflating assets of the company on fraudulent statements (Moyo, 2012).
(3) Manipulation of expenses: intentional manipulation of expenditures is also a potential fraud involving financial statements at Apollo Shoes. Capitalizing normal operating expenses is an instance of manipulating expenses. This scheme is an improper way of delaying recognition of expenditures and artificially raising income figures. Manipulation and concealment of liabilities frauds comprise failure to record accounts payables or failure to report regular expenditures on fiscal statements. Writing off funds lent to managers and executives, and keeping certain liabilities are potential common methods of fraud at Apollo Shoes (Louwers et al., 2011). (4) Inadequate or improper disclosures: disclosure frauds are typically based upon misrepresenting the firm and making untrue representations in press releases and other filings of the company. Some disclosures could be intentionally obscuring or confusing and it might be difficult to completely comprehend them. Improper disclosures can occur when one makes statements that are actually false in the commentary sections of reports (Moyo, 2012).
Types of evidence
The various types of evidence to look for in determining whether financial statement fraud is actually occurring at Apollo Shoes include the following: (1) fictitious invoices and fictitious sales: the fraudster may deliberately post sales before the sales have occurred thereby recognizing revenue improperly. (2) Fictitious inventory: the fraudster may inflate the quantity of inventory or inflate the value of the inventory. There could also be improper or fraudulent inventory capitalization. Looking for fictitious inventory will help to determine whether asset overstatement schemes are taking place (Moyo, 2012). (3) Fictitious receivables: looking for fictitious receivables will help to determine if the value of receivables is being artificially inflated. (4) False representations of the company in press releases and in other filings of the company can also be used as evidence. Other types of evidence include fictitious equipment; improperly calculated depreciation expense and which has been charged to the project costs; inventory that has been improperly capitalized; and failure to write-off bad debts (Moyo, 2012).
Substantive procedures will be used to analyze potential fraud schemes
To analyze potential financial statement fraud schemes, substantive procedures will be used as illustrated in the table below:
Potential fraud schemesSubstantive procedureDescription 1Accounts receivables schemes Accounts receivable processThe auditor will pull a sample of customers/clients from the accounts receivables ledger of Apollo and then review the original information that led to the current balance. Reviewing the original sales, the auditor will establish that a sale on account happened, leading t...