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67 Cards in this Set
- Front
- Back
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Accounting System |
comprises the methods by which companies record transactions and financial activities. This includes tracking of business activities (including the initial entry into the company's records), classification of information, and presenting the information to the end user. |
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Accrual Basis |
revenue is recognized when it is earned and expenses are recorded when they are incurred. The accrual basis includes two major areas: accounts receivable and accounts payable |
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Cash basis |
the receipt of funds into an entity, and the payment for goods and services. -Revenue is recorded when it is received, and expenses are recorded when they are paid. The cash basis is not widely used for financial statement reporting purposes. |
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Compilations |
outside accountants simply format and report management's results and balances consistent with Generally Acceptable accounting principles(GAAP) -simply financial reporting, and provide the lowest level of assurance at the lowest cost |
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Reviews |
Review of financial statements, accountants provide the same reporting as for compilations, but also preform inquiry and analytical review procedures over the information. No opinion is expressed on the financial statements. |
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Audits |
audited financial statements are reported in accordance with GAAP, but detailed audit procedures are performed on the financial results and balances, and also on the internal controls of the organization being audited |
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Balance sheet |
a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. |
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5 Accounting Cycles |
1. Sales and Accounts Receivable 2. Purchases and Accounts Payable 3. Human Resources and Payroll 4. Inventory and Storage/Warehousing 5. Capital Expenditures |
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Sales and Accounts Receivable |
Getting business from customers, billing for those goods or services, and then making sure the accounts receivable are collected -revenue from sales appears on a company's income statement while accounts receivable appears on the balance sheet |
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Minimize Financial Risk |
1. Approval of customer's credit limits 2. Having a system for receiving and recording orders from customers and then invoicing them 3. Collecting the amounts owed from customers 4. Making appropriate adjustments to customers' accounts for returns, write-offs |
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Internal Controls to minimize asset misappropriation or theft |
1. separation of duties 2. physical safeguards and assets 3. audit trail 4. approval process 5. independent checks on the system |
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purchases and accounts payable |
relates to the expenses a company incurs from the payment of goods and services. this cycle is the most susceptible to breakdowns in controls -affects cash, inventory, prepaid expenses, equipment, land, cost of goods sold, advertising |
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controls for minimizing risk within purchasing and accounts payable |
1. approving new vendors and ensuring they exist and are legit 2. proper purchasing of purchase orders 3. proper handling of the receipt and recording of goods and services 4. recording of liabilities and processing invoices for payment 5. reconciliation of accounts is critical - accounts must be monitored, reconciled, and updated in a timely manner |
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human resources and payroll |
recruitment, retention, and remuneration of employees, and the related underlying data of time records, expense reports and other matters -effects cash and payroll taxes payable on the balance sheet |
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safeguards to prevent fraud in payroll cycle |
1. segregation between the individuals who mange human resources 2. proper documentation of timesheets 3. need for approval related to hiring and firing of employees, overtime, travels |
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inventory and storage/warehousing |
encompasses the purchasing function as it relates to the company's inventory; also includes the warehousing of products for both manufacture and resale -processing requisitions for purchases, receipt of raw materials and finished goods, storage and shipment -affects inventory on balance sheet and cost of goods sold on income statement |
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Safeguards to prevent fraud in warehousing cycle |
audit trail segregation of duties physical security systematic controls |
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capital expenditures |
(repayment cycle)includes the borrowing of funds, the debt of a company -recording of capital purchases and the related financing; payment of interest and dividends |
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journals |
a journal is an accounting book of original entry where transactions are initially entered, provides a chronological list of transactions -essentially shows each transaction and the corresponding debit and credit entries and identifies which accounts they affect within the chart of accounts |
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general ledger |
holds account information necessary to make financial statements. contains detailed record of a given financial transaction - journal entries may be added to the general ledger during month-end processing -transactions of all the ledgers and journals flow into the general ledger. |
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financial analysis |
necessary to perform financial analysis as part of due diligence -as part of an investigation after a fraud has occurred or is believed to have occurred -first step to conduct a financial analysis is to understand the business |
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income statement |
provides info regarding the revenue and expenses of a company |
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financial statement fraud |
the deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users particularly investors and creditors |
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Two types of fin. statement fraud |
1. intentional misstatements/ also includes omissions of amounts or disclosures in financial statements to deceive users 2. theft or defalcation: misstatement arising from misappropriation of assets |
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schemes of fin. statement fraud |
falsification or manipulation of records, omission of events, misapplication of accounting principles, omissions of inadequate disclosures regarding accounting principles and policies and related financial amounts |
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fictitious revenues |
involve the recording of sales of goods/services that did not occur -revenue is recognized when it is realized or realizable or is earned |
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Sales and conditions |
form of fictitious revenue -sale is booked even though some terms have not been completed and the rights and risks of ownership have not passed to the purchaser |
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timing differences |
recording of revenue or expenses in improper time periods 1. matching revenues with expenses 2. premature revenue recognition 3. long term contracts 4. channel stuffing |
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matching revenues with expenses (timing differences) |
-revenue and corresponding expenses are not recorded or matched in the same accounting period |
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premature revenue recognition (timing differences) |
revenue should only be recognized when a sale is complete. (when the title is passed from the seller to the buyer) -leads to financial statement misrepresentation and serves as a catalyst to further fraud |
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revenue recognition |
1.persuasive evidence of an arrangement must exist 2.delivery must have occurred or services must be rendered 3. the sellers price to the buyer must be fixed or determined 4. collect ability is reasonably assured |
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long term contracts (timing differences) |
long term contracts pose problems for revenue recognition; revenue must be recognized in accordance with the contract terms |
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channel stuffing (timing differences) |
refers to sale of an unusually large quantity of a product to distributors, who are encouraged to overbuy through the use of deep discounts and/or extended payment terms |
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red flags with timing differences |
1. rapid growth or unusual profitability, especially compared to that of other companies in the same industry 2. recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth 3. unusual growth in number of days' sales in receivables 4. unusual decline in the number of days' purchases in accounts payable |
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improper disclosures |
accounting principles require financial statements and accompanying notes to include all necessary information - all significant information must be disclosed and should not be misleading. improper disclosures related to financial statement fraud usually involve the following: a. liability omissions b. subsequent events c. management fraud d. related-party transactions e. accounting changes |
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liability omissions |
-failure to disclose loan covenants or contingent liabilities -contingent liabilities are potential obligations that will materialize only if certain events occur in the future. i.e. potential loss that occur in the future once various uncertainties have been resolved |
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subsequent events |
-events occurring or becoming known after the close of the period may have a significant effect on the financial statements and should be disclosed -fraudsters may avoid disclosing court judgments and regulatory decisions that undermine the reported values of assets, that indicate unrecorded liabilities or that adversely reflect on management integrity |
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related party transactions |
occur when a company does business with another entity whose management or operating policies can be controlled of significantly influenced by the company or by some other party in common -must be fully disclosed and they are okay |
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3 accounting changes |
there are 3 types of accounting changes that must be disclosed to avoid misleading the user of financial statements; accounting principles, estimates, and reporting entities |
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trending analysis |
used to identify performance trends - shows the direction of the business -involves using the entity's financial information for more than one period such as years, quarters, and months and comparing the results and balances within key elements between periods |
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horizontal analysis |
utilizes information on financial statements to calculate individual elements or line items as a percentage of the totals -uses percentage comparison from one accounting period to the next -compares the amounts of balances between accounting periods to identify an increase or decrease for each item by the base period amount (year - base year) / base year |
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vertical analysis |
utilizes information on financial statements to calculate individual elements or line items as a percentage of the totals -compares the major financial items for the same period to a specific base item |
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current ratio |
standard measure of an entity's financial health -whether a business can meet its current obligations by determining whether it has sufficient assets to cover its liabilities assets/liabilities |
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quick ratio |
measures business's liquidity quick assets/liabilities -inventory excluded -the higher the ratio the higher the level of liquidity |
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inventory turnover ratio |
measures how often inventory turns over during the course of the year COGS / average value of inventory |
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accounts receivable turnover ratio |
provides an indicator as to how quickly an entity's customers/clients are paying their bills -the greater the number of times receivables turn over during the year the less the time between the sales and cash collections and hence better cash flow net sales /accounts receivable |
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accounts payable ratio |
how quickly an entity pays its trade debts -high ratio means a short time between purchase and payment(not always good) -low ratio means company has cash flow problems cost of sales/trade accounts payable |
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debt to equity ratio |
an indicator of how much the company is in debt by comparing debt with equity total liabilities/total shareholders equity -a high ratio could mean the company is relying more on creditor financing than investor financing |
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gross margin ratio |
indicates how well or efficiently a proprietor, group of partners, or managers of a company have run that business gross profit/total sales high ratio means a profit on sales, however a high margin but with falling sales could be indicative of overpricing or shrinking market |
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return on sales ratio |
determine whether an entity is getting a sufficient return on its revenues or sales net profit/sales can help determine how an entity can adjust prices to make a gross profit sufficient to cover expenses and earn an adequate net profit |
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data mining as an analysis tool |
data mining: process of analyzing data to identify patterns or relationships -can help determine what relevant data might be available, what skills are available within the team, how will the data analysis fit in with the wider investigation |
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limitation of data mining |
you can analyze or mine only what the companies provide you -limited to the examiners experience level (ability to manipulate larger volumes of data)(ability to analyze statements and produce ratios) |
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risk vs fraud risk |
risk- likelihood of loss fraud risk- vulnerability of an organization has to overcoming the interrelated elements that enable someone to commit fraud. risk is a business concept that requires understanding of financial concepts, the business what is the value/ return on investment |
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formula of risk |
risk = threat * vulnerability |
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threats |
threat- what you're trying to protect against 1. natural disasters 2. system/process failures 3. accidental human behavior 4. malicious intent |
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vulnerabilities |
the weakness in controls/protection efforts -what protections do you have in place to protect your organization from financial threats? -weak safeguards leads to high vulnerability |
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fraud risk management |
the goal is to prevent vulnerabilities from being exploited -manage vulnerabilities -identify new vulnerabilities -minimize the impact of threats |
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qualities of an effective risk management plan |
-vulnerabilities and threats are specific to the organization -risk prioritization -use of policies, standards and guidelines and procedures to establish expectations of how to manage threats and vulnerabilities -business driven -identification of the inter dependency between risks -ability to assess the effectiveness of the risk management procedures |
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factors that influence fraud risk |
-nature of the business - operating environment -effectiveness of internal controls: must have well designed preventative and detective controls -ethnics and values of the company and the people within it (are the guidelines clear) |
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fraud risk assessment |
a process aimed at proactively identifying and addressing an organizations vulnerabilities to internal and external fraud -objective is to help an organization recognize what makes it most vulnerable to fraud so that it can take proactive measures to reduce its exposure |
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benefits of fraud risk assessments |
-improve communication about and awareness of fraud -identify what activities are the most vulnerable to fraud -know who puts the organization at the greatest risk of fraud -develop plans to mitigate fraud risk -develop techniques to determine if fraud has occurred in high-risk areas |
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pcaob |
public company accounting oversight board |
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Key elements for conducting a good fraud risk assessment |
-collaborative effort of management and auditors -the right sponsor (must be someone in a senior position) - independence and objectivity of the people leading and conducting the work -a good working knowledge of the business -access to people at all levels of the organization -engendered trust -the ability to think like a bad guy -a plan to keep it alive and relevant |
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Assembling the right team |
-accounting and finance personnel -personnel with knowledge of day-to-day operations -risk management personnel -lawyers -members of ethics and compliance functions -internal auditors -external consultants -sponsor to approve |
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preparing the company for the fraud risk assessment |
-interviews -focus groups -surveys -anonymous feedback mechanisms |
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executing the fraud risk assessment |
1. identify potential inherent fraud risks 2. assessing the likelihood of occurrence of identified fraud risks 3. assessing the significance of the fraud risks to the organization 4. evaluation which people and departments are most likely to commit fraud and identifying the methods they are likely to use 5. identify and map existing preventative and detective controls to the relevant fraud 6. evaluate whether the identifies controls are operating effectively and efficiently 7. identify and evaluate residual fraud risks resulting from the ineffective or nonexistent controls |
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four approaches for responding to residual fraud risks |
1. avoid the risk 2. transfer the risk 3. mitigate the risk 4. assume the risk 5. or a combination approach |
