Question & Answer: Evaluate the types of financial statement fraud that has occurred in the past and predict what types of fraud may / or may not b…..

Solution:

Fraud with financial statements occurs due to lack of accounting principles and code of conduct like integrity, validity, relevance, and materiality etc. Some of the common fraud that has occurred in the past are given below:-

1. Misappropriation of cash: Omission of cash transactions or fictitious transactions of the cash transaction in the books of accounts.

2. Misappropriation of Inventory: Due to lack of internal control and check system, there are artificial transactions of inventory loss or theft otherwise used for personal use.

3. Improper disclosures: Some disclosures which are intentionally made complex in the annual report so that users of the information might not able to understand.

4. Over stating assets: Over statement of assets is also one of the common fraud which can lead to misrepresentation for investor perspective.

5. Under Statement of liabilities: Over statement of assets is also one of the common fraud which can lead to misrepresentation for investor perspective.

Some of the common fraud which are concered with future are :-

1. Under Statement of revenues: If the sales order received in advance for the next year are shown in the last month of the current financial year. It will lead to under estimation of revenue and profits, which is against the principle of materiality.

2. Over statement of expenses: If the expenses which are due in the last month of the fiscal year are shown at the first week of next month of the new financial year then it will lead to over statement of expenses for the next year which is against the principle of materiality.

3. Inventory and cash misappropriation: Inventory and cash misappropriation are the common deceptive items for the present as well as future. Majority of fraud is concerned with the manipulation of cash and inventory. Showing over cash and inventory will over value the asset base of the company.

The company can have proper control on revenue and expense recognition through effective internal control and check system but items which are a deal on daily basis i.e. inward and outward like cash and inventory, it is hard to have a proper check in a practical sense. Such frauds may occur in future also in relation to these items like Stock issued to a friend without consideration by warehouse manager shown as loss or theft.

Note: Still every thing depends on the status of internal control and check system to reduce the frequency of frauds.